Income Tax Appellate Tribunal - Hyderabad
M/S. A.S.P. Software Solutions ... vs Department Of Income Tax on 11 June, 2012
IN THE INCOME TAX APPELLATE TRIBUNAL
HYDERABAD BENCH 'A', HYDERABAD
BEFORE SHRI B.RAMAKOTAIAH, ACCOUNTANT MEMBER
AND SHRI SAKTIJIT DEY, JUDICIAL MEMBER
ITA No.1175/Hyd/2012 : Assessment year 2008-09
Dy. Commissioner of Income- V/s. M/s. A.S.P. Software Solutions Pvt.
tax Central Circle 6, Hyderabad. Ltd., presently known as
Venkateswara Financiers
Hyderabad
( PAN - AACCA 8663 J)
(Appellant) (Respondent)
ITA No.1181/Hyd/2012 : Assessment year 2008-09
M/s. A.S.P. Software Solutions V/s. Dy. Commissioner of Income-tax
Pvt. Ltd., presently known as Central Circle 6, Hyderabad.
Venkateswara Financiers
Hyderabad
( PAN - AACCA 8663 J)
(Appellant) (Respondent)
Assessee by : Shri K.Gopal
Department by : Shri M.Ravindra Sai, CIT-DR
Date of Hearing 08.01.2013
Date of Pronouncement 18.01.2013
2 ITA No.1175 & 1181/Hyd/2012
M/s. A.S.P. Software Solutions Pvt. Ltd.,
Hyderabad
ORDER
Per Bench These are cross appeals against the order of the Commissioner of Income-tax(Appeals) I, Hyderabad dated 11.06.2012 for the assessment year 2008-09.
2. Assessee has raised the following grounds in its appeal-
"1. The learned CIT(A)-I, Hyderabad erred in confirming the total income of the Appellant at Rs.6,43,20,260/- as against the returned income of Rs.63,77,632 without appreciating the fact and circumstance of the case.
2. The learned CIT(A) -I, Hyderabad having found as a matter of fact that the Appellant had offered the income in the original return of income filed much before the date of search, ought to have a nulled the entire 153C proceedings as no Undisclosed documents were found in relation to the disclosed transaction by the Appellant , and hence the order passed by the learned CIT(A)-I, Hyderabad is wholly unsustainable and is to be quashed.
3. The learned CIT(A)-I, Hyderabad ought to have clearly held that the proceedings u/s. 153C of the I.T. Act 1961 initiated against the Appellant was on a wrong foundation of reasoning arising out of presumptions, assumptions and reappraisal of the same set of facts in respect of a disclosed transaction much before the date of search and was thus not capable of being upheld statutorily or otherwise and therefore the order passed by the A.O. ought to have been quashed by the learned CIT(A)-I.
4. The learned CIT(A) I, Hyderabad ought to have clearly held that the extinguishment of debt redeemed with the financial institutions resulted in a notional surplus/surplus on capital account not exigible to tax. The learned CIT(A) I ought to have deleted the entire amount of Rs.42,20,31,114/- which included the sum of Rs.6,43,20,260/- sustained by the learned CIT(A)-I.
5. The learned CIT(A) I, Hyderabad erred in treating the alleged gains out of transfer of the shares as 'Business Income', without appreciating the facts that the Appellant held the shares as investment. The impugned transaction cannot be deemed to be an 3 ITA No.1175 & 1181/Hyd/2012 M/s. A.S.P. Software Solutions Pvt. Ltd., Hyderabad adventure in the nature of trade. Thus, the addition of Rs.6,43,20,260/- is not justified and the same may be deleted.
6. Without prejudice to grounds No.2 to 5, the learned CIT(A)-I, Hyderabad failed to appreciate that the ad-hoc addition to adopt the share value at Rs.10/- per share for the purpose of computing profits on sale of shares by the appellant Company is a notional income and same is on presumption and surmises. Thus, the addition of Rs.6,43,20,260/- is not justified and the same may be deleted.
7. The learned CIT(A)-I, Hyderabad failed to note that there was no provision in the Income Tax Act 1961 to substitute the price of share with any value when the contracted value of the shares between the parties was not doubted and therefore erred in sustaining the addition of Rs.6,43,20,260/-.
8. The learned CIT(A)-I Hyderabad and Assessing Officer erred in levying interest under section 234B and section 234D without appreciating the fact that the appellant denies liability to pay the same. Hence, the same are not leviable.
9 ......"
The assessee, vide letter dated 27.9.2012 has raised additional grounds, which are as under-
"1. The Assessment Order passed under section 143(3) r.w.s. 153C is void-ab-initio and bad in law as the Appellant was never served with any notice initiating the proceedings under section 153C.
2. The notice dated 28/04/2010 is without any jurisdiction and the same is bad in law. Thus, the Assessment Oder passed under section 143(3) r.w.s.153C dated 29/12/2011, is bad in law and the same may be quashed.
3. The jurisdiction under section 153C has not been validly invoked since no proper and relevant documents necessary for invoking the same were found during the search and hence the assessment under section 153C was invalid and illegal.
4. ..........."
These additional grounds, being legal in nature, are admitted.
4 ITA No.1175 & 1181/Hyd/2012M/s. A.S.P. Software Solutions Pvt. Ltd., Hyderabad
3. The Revenue in its appeal has raised the following grounds-
"1. The order of the CIT(A) is erroneous both on facts and in law.
2. The CIT(A) is not justified in restricting the addition made on account of profit earned on debt assignment to Rs.6,43,20,260 as against Rs.42,20,114/- arrived at by the Assessing Officer.
3. The CIT(A) is not correct in adopting the value of Share of LVS Power Ltd. at Rs.10/- per share instead of Rs.50 /- as adopted by the Assessing Officer.
4. The CIT(A) ought to have appreciated the fact that the assessee company itself has adopted the value at Rs.50/- per share in its books of account while recording the transaction of debt assignment.
5. The CIT(A) ought to have ordered for addition of Rs.5,30,23,056/- of interest received by the assessee from LVS Power Ltd., during the year as noted in Su-Para 4 of 4.5.1 of the Assessment order, when he differed with the figures adopted by the Assessing Officer.
6. .....
4. Briefly stated facts of the case are that action u/s.132 of the I.T. Act was initiated in the case of one A. Venkat Rama Reddy and his family companies on 20-08-2009. In the course of search proceedings in the above case, certain documents and loose sheets belonged to the assessee were seized from the residence of A.Venkat Rama Reddy as well as in the business premises of M/s. L.V.S. Power Ltd. Consequently notice under section 153C was issued to the assessee company, in response to which assessee filed its return of income for the assessment year 2008-09 on 03-06-2010 disclosing total income of Rs. 63,77,632/- which is reiteration of the original income returned on 22-09-2008. During assessment proceedings, the Assessing Officer observed that M/s. LVS Power Ltd with its registered office at D.No.8- 2-269/5/90, Sagar Coop. Society, Banjara Hills, Hyderabad was incorporated under Companies Act with a paid up share capital of Rs. 45,80,68,980/-. It has entered into an agreement with AP Transco to the effect that it has to keep its power plant in back down/ready to operate condition and in return receiving fixed costs from the AP Transco and claimed deduction under 5 ITA No.1175 & 1181/Hyd/2012 M/s. A.S.P. Software Solutions Pvt. Ltd., Hyderabad S.80IA(iv). Further, the Assessing Officer observed that M/s. ASP Software Solutions Pvt Ltd (assessee in question) was incorporated under Companies Act with its registered office at H.No.3-4-872/3, Barkatpura, Hyderabad with a paid up share capital of Rs.1,95,24,290/- and engaged in software development. The assessee company is one of the major share holder in M/s. LVS Power Ltd with 60,00,000 shares having 13.10% in the paid up capital. In the assessment order, the Assessing Officer has detailed the facts and figures relating to the turnover and profit of the assessee company in a tabular form at page 3 para 1.2 as per which up to assessment year 2007- 08, net profit was shown at loss only and only in the current assessment year a net profit of Rs.95.63 lakhs was shown. Shri Venkatesh Reddy is the Managing Director of the assessee company with 98.29% share holding.
5. M/s. LVS Power Ltd had an accumulated debt along with interest of Rs. 73.9 crores payable to various financial institutions such as lDBI, IFCI and Bank of Baroda etc. Due to its failure to service the debt, the financial institutions had assigned the debt to the assessee company by a separate Debt Assignment Deeds with lDBI, BOB and IFCI on various dates. As per the same, the assessee company should pay Rs.33,67,00,045/- being the debt payable by the LVS Power to the said institutions. An MOU was entered with LVS Power Ltd by the assessee company and fulfilled its obligation by liquidating the required sum by paying to the financial institutions. As per the MOU,M/s.LVS Power would offer equity in the event of default, as part payment based on the valuation of the Chartered Accountants. Accordingly, they engaged M/s. Surya Chandra &Associates, Hyderabad to ascertain its net worth of M/s. LVS Power Ltd vide valuation report dated 31-12-2007 and arrived at the share value at Rs.55.82/- (face value Rs.10/-). M/s. LVS Power Ltd has repaid its debt towards financial institutions to the assessee company by cheques on various dates and also by allotment of shares of 89,42,772 @ 6 ITA No.1175 & 1181/Hyd/2012 M/s. A.S.P. Software Solutions Pvt. Ltd., Hyderabad Rs.50/- per share, totalling Rs.44,71,38,600/-. In brief, the assessee company has settled the debt to the tune of Rs.78.39 crores by paying Rs.33.67 crores to the Fls and made a profit of Rs.42.20 crores.
6. The shares thus acquired by the assessee company were sold to one Shri A.Raghava Reddy and one Shri A.Jaipal Reddy who are having business relations with Venkata Rama Reddy for Rs4.OO and Rs.3.75 respectively on 21-02-2008 who in turn sold all the shares to one Shri Narasimha Reddy for Rs.2.25/-. Shri Narasimha Reddy again sold all the shares to Shri A.Venkata Rama Reddy on 14-10-2008 at Rs.2.24 per share. On its part, assessee company made a net profit of Rs.95,52,935/- in the entire transaction. Out of this, the assessee had set off the brought forward depreciation of Rs.31,76,886/- and offered Rs.63,77,632/- to tax.
7. The Assessing Officer observed that the discount of 96% at which shares of M/s.LVS Power Ltd are sold to the Managing Director of the company from which shares were originated in a span of three months speak the grandness of tax evasive design made by the assessee company by introducing certain name lenders who have intimate business connections with the assessee group. Further observed that it is only an artificial suppression of share price just to avoid tax and circumvent the provisions of the law. The method followed by the assessee is was held to be dubious and alien to the known principles of accounting and not recognized by the IT. Act. It has clubbed two transactions to suit its design viz. receipt of consideration in shares and sale of the same. The payment received by the assessee by way of allotment of shares by M/s. LVS Power Ltd was a part consideration in a scheme of debt assignment whereas sale of those shares by the assessee company is application of assets acquired and thus it is a totally different transaction altogether. By clubbing these two things and by 7 ITA No.1175 & 1181/Hyd/2012 M/s. A.S.P. Software Solutions Pvt. Ltd., Hyderabad artificially suppressing the share value without any basis, assessee tried to get a way by offering just Rs.95,53,OOO/- as against a business profit of Rs.44.71 crores earned by adventuring into debt assignment. The Assessing Officer during assessment proceedings asked the assessee to explain as to why the net profit earned in debt assignment cannot be brought to tax. In reply the assessee stated that the transaction is capital in nature and therefore cannot be taxed as revenue receipt. The Assessing Officer rejected the explanation of the assessee for the reason that assessee itself had offered the profit made out of debt assignment as business income and what is to be decided is the quantum of such income. On the contention of assessee that the receipt is capital in nature, the Assessing Officer further held that the assessee had entered into debt assignment agreement with all the FIs and MOU with LVS during the financial year 2006-07 relevant to AY 2007-08 itself. The total debt has not been taken into its balance sheet and only the amounts paid to banks have been shown as an investment in LVS Power Ltd. In AY 2008-09, there is no entry in the balance sheet on the debt assignment. The ledgers of debt assignment and capital reserve submitted by the assessee along with reply is only an afterthought and not part of neither the seized material nor it was submitted by the assessee during assessment proceedings. The Assessing Officer brushed aside the explanation of the assessee that it had inadvertently taken the surplus on account of debt assignment as income by wrong advice/guidance for the finding that assessee set off the carry forward losses to the tune of Rs.31 lakhs from out of income earned on debt assignment.
8. The Assessing Officer held that assessee adopted a grand tax evasive design in a systematic way by - (i) assigning the debt to it,
(ii)diluting the existing shares of LVS Power Ltd, (iii) allotting the shares to assessee company by LVS Power Ltd at Rs.5O/-per share, (iv) routing these 8 ITA No.1175 & 1181/Hyd/2012 M/s. A.S.P. Software Solutions Pvt. Ltd., Hyderabad shares through pre-arranged name lenders viz A.Jaipal Reddy and A. Raghava Reddy and A.Narasimha Reddy and (v) finally channelizing the entire set of 89,42,772 shares to Venkat Rama Reddy, MD of M/s. LVS Power Ltd and of the assessee company (presently known as Venkateswara Financiers). The Assessing Officer took support from the clause in the MOU signed by M/s. LVS Power Ltd and the assessee company on 23-12-2006 wherein it was provided that interest @ 16.11% starting from 01-04-2007 is payable which is enough evidence to prove that the transaction is revenue in nature but not in the capital field as claimed by the assessee. The Assessing Officer also relied on the subsequent events that M/s. LVS Power Ltd had sold their shares @ Rs.27/- per share to M/s.Green Co Ltd during the previous year relevant to assessment year 2011-12 besides getting a dividend of Rs4/- per share during the financial year relevant to assessment year 2010- 11 which shows that share value of Rs.5O/- adopted by the company was real and the sale of shares at Rs4/- and Rs.3.75 to relatives of the management of M/s. LVS Power Ltd by the assessee is a stage managed one. The Assessing Officer held that it is the case of suppression of actual price and creating artificial price for the share to avoid tax liability and circumvent the provisions of law. The AO also observed that the name lenders Shri A.Jaipal Reddy, Shri Raghava Reddy and Shri Narasimha Reddy in their sworn depositions gave stereo typed replies stating that they had purchased the shares because they were offered at a lesser price than its face value. They had sold the shares within 6 months because the share price was not listed at the rate they expected and in the process incurred losses but this loss was not claimed by them in their books. The Assessing Officer held that they failed to establish that they had genuine interest of making money by purchase of these shares.
9. Thus, for the reasons discussed above, the Assessing Officer held that the nature of income earned by the assessee is covered u/s.28 of I.T. 9 ITA No.1175 & 1181/Hyd/2012 M/s. A.S.P. Software Solutions Pvt. Ltd., Hyderabad Act and not capital as claimed by the assessee. The Assessing Officer brought the profit earned on debt assignment of Rs.42,20,31,114/- to tax. The income was thus assessed at Rs. 42,84,08,746/-.
10. Before the CIT(A), it was contended that the proceedings under S.153C were wrongly initiated as there was no incriminating material and further, on merits, it was contended that there was no profit realised to the extent of Rs.42,20,31,114 brought to tax by the Assessing Officer, and further, the Assessing Officer did not appreciate the entire transaction, and should have accepted the income offered. The assessee has raised various grounds, running into 18 before the CIT(A). The CIT(A) has considered the issue whether the provisions of S.153C are proper or not and held that in view of seizure of documents, S.153C were validly initiated by the Assessing Officer. With reference to the issue of computation of profit made by the Assessing Officer, while accepting that the assessee has correctly taken the valuation of shares at Rs.50 and has recorded the same in the books, he found that there is no justification to interfere with the value adopted by the Assessing Officer in respect of the shares received by the assessee company, in view of debt assignment which is as per the accounts. He further held that the Assessing Officer was not correct in computing the profit upto the date of allotment of shares ignoring that subsequent sale of shares and therefore, the profit brought to tax by the Assessing Officer was deleted. However, he did not accept that the sale price of the shares could be so low as contended by the assessee, and therefore, he went on to fix the fair share value at Rs.10 for the purpose of computing the profits on sale of shares. Therefore, as against Rs.3,46,60,399 sale proceeds accounted by the assessee company in the books of account, the CIT(A) re-determined the sale price at Rs.10 crores, thereby making an addition of Rs.6,43,20,260. Accordingly, both the parties are aggrieved.
10 ITA No.1175 & 1181/Hyd/2012M/s. A.S.P. Software Solutions Pvt. Ltd., Hyderabad
11. With reference to the assessee's appeal, the learned counsel made three-fold submissions. Firstly, that the notice issued under S.153A dated 28.4.2010 is without jurisdiction and completion of proceedings under S.153C is not correct. With reference to the documents found and seized stated to be incriminating, it was submitted that the documents seized were nothing but MOU entered by the assessee company, annual report and copies of the share certificates, the details of which are already mentioned in the annual report and placed before the authorities before the search. Therefore, these documents are not incriminating and the proceedings under S.153C could not be initiated, and further there is no satisfaction recorded by the Assessing Officer and in support, he filed the order sheets of the assessee company and as well as the order sheet of LVS Power Ltd., the other company, to contend that there is no satisfaction recorded by the Assessing Officer. In this regard, it was submitted that the notice under S.153A is not valid as there was neither search action under S.132 nor requisition under S.132A against the assessee. Thus, notice issued under S.153A is without any jurisdiction. Hence, the assessment order passed by the Assessing Officer was without proper notice is bad in law and void ab initio. It is submitted the order under S.143(3)read with S.153C passed is liable to be quashed. In support of this proposition, reliance is placed ont eh decision of Allahabad High Court in the case of CIT V/s. Shital Prasad Kharag Prasad(280 ITR 541). It is further submitted that the notice was issued under S.153A and no notice under S.153C was issued. For that reason also, it is submitted that the assessment order dated 29.12.2011 passed under S.143(3) read with S.153C is bad in law. It is further submitted at this juncture that the protection under S.292B or S.292BB cannot be extended to a notice where the issue pertains to assumption of jurisdiction.
11 ITA No.1175 & 1181/Hyd/2012M/s. A.S.P. Software Solutions Pvt. Ltd., Hyderabad
12. Secondly, it was submitted that there is no satisfaction recorded by the Assessing Officer to indicate that the documents found and seized during the course of search are incriminating. The documents found during the course of search action has not unearthed any transaction not disclosed to the department by the assessee. In the absence of any such satisfaction, the proceedings initiated under S.153A culminated into order under S.143(3) read with S.153C dated 29.12.2010 is bad in law and void ab initio. In this context, the learned counsel placed reliance on the following decisions-
(a) Decision of Bombay Bench 'H of the Tribunal in the case of Bejay Securities & Finance Ltd. V/s. ACIT (ITA No.4859 to 4865/Mum/2009 AYs 2001-02 to 2007-08) dated 24.6.2011;
(b) Decision of Bombay Bench 'H' of the Tribunal in the case of Anil P.Khimani V./s. Dy. CIT (ITA No.2855 to 2860/Mum/2008 for assessment years 1999-2000 to 20004-05) dated 23.2.2010;
(c) Jindal Stainless Learned. V/s. ACIT(120 ITD 301)-Del.
(d) Singhad Technical Education Society V/s. ACIT (140 TTJ 233)-
Pune.
(e) SSP Aviation Ltd. V/s. DCIT (346 ITR 177)-Del.
(f) Ingram Micro (India) Exports V/s. DDIT ITAT (Mumbai)
13. The third contention is with reference to merits in relation to which it is stated that the Assessing Officer as well as the CIT(A) have failed to appreciate the transaction. The assessee acquired the debt amounting to Rs.73.9 cores as an actionable claim from the financial institutions viz. IDBI, IFCI and BOB recoverable from LVS Power Ltd. and payment of R.33,67,00,045 out of the borrowed capital and incurred an interest expenditure of Rs.3,11,71,871. The assessee out of the debt of Rs.73.9 12 ITA No.1175 & 1181/Hyd/2012 M/s. A.S.P. Software Solutions Pvt. Ltd., Hyderabad crores recovered Rs.33,67,64,456 and remaining debt along with the interest thereon was converted into equity shares of LVS Power Ltd. The equity shares numbering 89,42,722 were subsequently sold for a total consideration of Rs.3,46,60,395 and the gains of Rs.95,52,935 was offered to tax. The assessee, therefore, submitted that the Assessing Officer is not justified in treating the allotment of shares as a receipt of Rs.44,71,38,600 and making an addition of Rs.42,20,31,114 to the income of the assessee.
14. Alternately, it was further submitted by the learned counsel for the assessee that it is only the debt which has been converted into equity shares, and since such conversion does not amount to transfer, it does not give rise to any taxable event. In this behalf, reliance is placed on the following-
(i) CBDT Circular No.621 dated 19th December, 1991(1992) 195 ITR (ST) 154
(ii) Memorandum Explaining the Provisions in the finance (No.2) Bill, 1991(1991) 190 ITR (St) 270).
The learned counsel for the assessee also submitted that the computation of gains has to be made considering the cost of acquisition of the debt and not on the basis of some notional figure. In support of this proposition, he relied on the decisions of the Mumbai Bench of the Tribunal in Titan Investment & Finance Co. Ltd. V/s. ITO (75 ITD 441) and ITO V/s. Essar Teleholdings (2009) 30 DTR (Mum)(Trib)273.
15. The learned counsel for the assessee further submitted that Assessing Officer has made the addition on allotment of shares ignoring the subsequent transfer of the shares for a consideration. The allotment of shares 13 ITA No.1175 & 1181/Hyd/2012 M/s. A.S.P. Software Solutions Pvt. Ltd., Hyderabad against the debt is a tax neutral event, as the cost of acquisition of the shares remains to be the cost at which the debt is acquired. Hence, the action of the Assessing Officer in making the addition of Rs.42,20.31,114 is not justified. It is further submitted that the CIT(A) is not justified in replacing the actual sale consideration with a notional figure of sale consideration. The addition of Rs.6,43,20,260, thus made, is not at all justified and the same may be deleted. Reliance in this behalf is placed on the decision of the Mumbai Bench of the Tribunal in the case of Rupee Finance & Management (P) Ltd. V/s. ACIT (129 ITD 539).
16. The learned counsel for the assessee further contended that the assessee has invested in the shares of LVS Power Ltd. in the year 2001. The debt of LVS Power Ltd. was acquired by assessee to protect the initial interest. Thus, the entire transaction is an investment and not an adventure in the nature of trade. In support of this contention, reliance is placed on the following decisions of the Calcutta High Court
(a) CIT V/s. Guest Keen & Nettlefold Ltd. (115 ITR 205)
(b) CIT V/s. Calcutta Discount Co.(P)Ltd (1672 ITR 680).
17. In reply, the Learned Departmental Representative submitted on the preliminary legal issue, that all that section 153C contemplates is that during the course of search material pertaining to another persons should be found and there should be no ambiguity as to whom the material pertains. If the Assessing Officer is satisfied that the seized material pertains to another person, he can initiate proceedings under S.153C. The satisfaction is with regard to the ownership of the document and not regarding quantification or amount of undisclosed income. In this behalf, he placed reliance on the 14 ITA No.1175 & 1181/Hyd/2012 M/s. A.S.P. Software Solutions Pvt. Ltd., Hyderabad decision of Bilaspur Bench of the Tribunal in the case of ACITV/s. Panchuram Deshmukh and Others (133 TTJ 53).
18. The Learned Departmental Representative with regard to the merits of the case submitted that the MOU entered into by the assessee with M/s. LVS Power Ltd. and the annual report carrying the transaction details regarding debt assignment were found and seized in the course of search at A/LVS/5, as mentioned in para 4.1 page 11 of the assessment order. The CIT(A) reiterated this position and has dealt with this aspect on pages 15 and 16 of the impugned order. He further submitted that the case-law relied upon by the learned counsel for the assessee is clearly distinguishable, inasmuch as the courts frowned upon only where frivolous and estimated additions were made without reference to any seized material, whereas in the facts of the present case, the documents seized throw a new light on the business transactions carried out by the assessee through debt assignment and consequential profits thereon, and as such the decisions relied upon by the learned counsel for the assessee, have no application to the facts of the present case.
19. As for the taxability of the business profits under S.28 of the Act, it is submitted that the assessee itself treated the transaction as business transaction and gave an elaborate note in its annual accounts as well as in annual report. In this behalf, attention was invited to item 5 of Notes on Accounts at page 150 of the paper-book. It is further submitted that the assessee itself filed its return of income and computed the business profit from the said debt assignment even considering the interest on loan as expenditure. This computation was filed with the original return under S.139(1) as well as in the return filed in response to notice under S.153C. He further pointed out that the MOU entered into with M/s. LVS Power 15 ITA No.1175 & 1181/Hyd/2012 M/s. A.S.P. Software Solutions Pvt. Ltd., Hyderabad provide for 16.16% of interest on part of debt taken over by the assessee from the financial institutions. It is further submitted that taking over debt is itself a risky transaction, and a person who takes over a debt is entering into an activity in the nature of adventure. If he is able to recover the debt or part of the debt, which in the first place was itself "bought" at discounted rate, is profit. If he is not able to recover, it is a loss. Therefore, the very activity of taking over a debt is in the nature of adventure or trade and is, therefore, rightly assessable under S.28 of the Act. Whether the entries are in capital side or revenue side is not really relevant. To illustrate, it is submitted by the Learned Departmental Representative, a person may buy a plant and machinery, make some repairs and sell it off at a profit. Just because Plant and Machinery is capital item, the profits derived do not take the character of capital receipt.
20. Reconciling the figures of Business Profit (GP-interest paid) arrived at by the Assessing Officer at Rs.42,61,92,176 and by the CIT(A) at Rs.6,43,20,260, the Learned Departmental Representative submitted that the main issue is whether the value of shares allotted should be adopted at Rs.50 per share or at Rs.10 per share as done by the CIT(A). The Assessing Officer took Rs.50 per share because that is backed by the Valuation Report based on which both the assessee and M/s.LVS Power transacted.
21. The Learned Departmental Representative, explaining the grievance of the Revenue in its appeal, submitted that the total debt, which was assigned and taken over by the assessee is Rs.73.088 crores. Against this, it is pointed out that the assessee received 8,94,27,720 shares at Rs.50 per share amounting to Rs.44,71,38,600, leaving a balance of Rs.28.374 crores. Against this balance, the assessee received by way of cheque payments Rs.33,67,64,450, which resulted in excess realization of 16 ITA No.1175 & 1181/Hyd/2012 M/s. A.S.P. Software Solutions Pvt. Ltd., Hyderabad Rs.5,30,24,450, representing interest received by the assessee, which should have been offered to tax, and which accordingly gave rise to the grievance of the assessee in ground No.3 of the Department's appeal.
22. We have considered the rival contentions and examined the facts on record. The issues for consideration in both appeals before us is whether the provisions of S.153C are applicable in the assessee's case, when no incriminating material was found. The other question to be considered is whether the Assessing Officer was correct in considering the amount of Rs.44.71 crores as profits in the debt transaction and the third issue to be considered is whether the CIT(A) was right in enhancing the sale value of the shares sold.
23. Before adverting to the legal provisions, we may note the factual aspects and issues in relation thereto first and then arrive at the legal contentions. The assessee in its computation of income has taken cheques received from M/s. LVS Power Ltd. at Rs.33,67,64,456 and the sale of shares totaling 89,42,772 at Rs.3,46,60,395 as the 'receipts' on debt assignment activity. As against this, the assessee deducted 'cost' by way of payment to banks of Rs.33,07,00,045 and further reduced the interest of Rs.3,11,71,871 paid to the banks on the borrowed funds. Therefore, on the gross receipts of Rs.3,71,42,4851, the assessee has declared net profit of Rs.95,52,934. It was the contention of the learned Assessing Officer that the assessee took the debt assignment totaling to Rs.73.90 crores and the assessee has paid an amount of Rs.33,07,00,045 to the banks as interest and hence the balance amount is profit in the debt assignment activity. The assessee instead of taking the book value of the shares allotted to the assessee by M/s. LVS Power Ltd., which were subsequently sold for an amount of Rs.3.46 crores, took the sale price directly as part of the receipts on debt assignment 17 ITA No.1175 & 1181/Hyd/2012 M/s. A.S.P. Software Solutions Pvt. Ltd., Hyderabad transaction. Even though the assessee has considered the sale consideration as part of the debt settlement, without making entries for adjustment to shares issued at premium of Rs.50 and subsequent sale at discounted price, thereby incurring loss at the time of sale of shares. The net result is the same. The Assessing Officer ignoring the sale of shares at a loss considered the allotment of shares at a premium as part of the debt and brought to tax the above amount of Rs.44.71 crores. It was rightly pointed out by the Ld. CIT(A) vide his observations in para 9.1, that Assessing Officer computed the amount of Rs.42 crores as income, taking into consideration the value of equity accepted in the assignment of debt directly to Receipt and Payment Account as on 31st January, 2008, instead of computing the income as on 31.3.2008, i.e. as at the end of the year. Therefore, we are of the opinion that the CIT(A)'s order in deleting the addition of Rs.42 cores is correct in the sense that the so-called gains brought to tax by the Assessing Officer in the debt assignment, gets nullified by the loss on sale of shares during the financial year itself at a discounted price.
24. There is no dispute with reference to the transaction of the debt assignment, nor there is a dispute with reference to sale of shares at a discounted price. At the relevant point of time, there is no value for the shares of the company, M/s. LVS Power Ltd. There is also no dispute with reference to the receipt of shares as part of the settlement of debt, which is considered by the Assessing Officer as business activity and the conversion of debt into shares, makes the shares a part of stock-in-trade. Therefore, in our view, the action of the assessee in taking the net value of the receipt towards the debt from M/s LVS and the sale value of shares as the 'receipts' in the debt assignment, and setting off the payments to banks and interest, as expenditure does not violate the computation of income, even though technically speaking that may not be the way in which entries could have been passed. Be that as it may, the net result of the transactions are that 18 ITA No.1175 & 1181/Hyd/2012 M/s. A.S.P. Software Solutions Pvt. Ltd., Hyderabad the assessee has earned a profit of Rs.95,52,934 as shown in the books of account. To that extent, the CIT(A)'s order in deleting of addition so made by the Assessing Officer is to be upheld.
25. The next issue on facts to be considered is the action of the CIT(A) in enhancing the sale value of Rs.10 on the sale of shares of 89,42,772. As briefly stated, the assessee has sold 45 lakh shares at Rs.4 per share and at 44,42,772 shares at Rs.3.75 per share, thereby receiving Rs.3,46,60,395 as proceeds on the sale of shares. The assessee instead of treating the sale of shares as a separate transaction, has taken the sale proceeds as part of debt receipts in the debt assignment activity. Therefore, there is no occasion to work out the cost of the shares and claim a loss in the second transaction, since the assessee treated it as if by way of payment from M/s. LVS Power on allotment of shares. Thus, the learned CIT(A), after accepting that there is no profit earned in the debt transaction as was considered by the Assessing Officer, however, went a step further and redetermined the sale price of Rs.10 per share to be reasonable and fair for the purpose of computing the profit on sale of shares. Therefore, as against Rs.3.46 crores received by the assessee, he directed the Assessing Officer to adopt the value of Rs.8.94 crores, thereby making an addition of Rs.6,43,20,260.
26. As rightly contended by the Ld. counsel for the assessee before us, the CIT(A) does not have any power to decide the sale price under the provisions of the Act, unless the transaction is considered as bogus or there is any evidence to indicate that the assessee has received more than what it stated to have received. The Income-tax Act does not permit change of sale value of sale of shares transaction. There are provisions to redetemine the purchase cost, if the transaction is collusive or with related parties, but 19 ITA No.1175 & 1181/Hyd/2012 M/s. A.S.P. Software Solutions Pvt. Ltd., Hyderabad refixing the sale value by certain notional means is not permitted in law while computing business income, except as provided specifically while calculating Capital Gains. Moreover, in arriving at the value of the shares at Rs.10/-, the CIT(A) has considered the subsequent sale of shares in September, 2008 to March, 2009 at Rs.10 per share by IDBI. As pointed out before us, the investment by IDBI is with certain buy back arrangement, and accordingly, the IDBI sold at Rs.10. Not only that, when the assessee has sold the shares at the price which it realized, there was a hope for a positive outcome of the litigation before the Hon'ble Supreme Court. Subsequently, the prices have fallen further, as the decision of the Hon'ble Supreme Court went against the assessee. On a review, the matter was reconsidered, and on that account, there was increase in the share price at a later point of time. These events do result in variation of price at various points of time. As seen from the orders, the Assessing Officer did enquire with the purchasers of the shares from the assessee company, who confirmed that they have invested money and again sold the shares at a lesser price. Therefore, the transactions cannot be considered as bogus or collusive. Even though the said parties may be known to the assessee's share-holders, nothing was brought on record to establish that the transactions are stage managed. As submitted by the assessee before the authorities, the Director of the company was in financial constraints and has to undertake this exercise so as to keep the company afloat consequent to the adverse decision of the Hon'ble Supreme Court in its litigation with A.P. Transco initially. This financial arrangement may be required in order to keep the companies alive. But it is not right to consider that the transactions are collusive in nature. There is confirmation from the said parties about the price paid for equity shares of M/s. LVS Power from the assessee, and therefore, the action of the CIT(A) in redetermining the sale price at Rs.10 cannot be upheld.
20 ITA No.1175 & 1181/Hyd/2012M/s. A.S.P. Software Solutions Pvt. Ltd., Hyderabad
27. Further, similar issue was considered by the Mumbai 'J' Bench of the Tribunal in the case of Rupee Finance & Management (P) Ltd. V/s. ACIT (120 ITD 539), wherein it has been held as follows-
"8.1 The first issue is whether the MoU in question can be considered as family arrangement or not. The second issue is whether the family arrangement is a make-belief and sham transaction. The third issue is whether the difference between the market value of the shares and the purchase price can be brought to tax in the hands of the assessee company under s. 69. The fourth issue is as to whether the difference in question referred to above, can be brought to tax in the hands of the assessee company under s. 28(iv).
8.2 We take up third and fourth issues first. Sec. 69 reads as follows :
"69. Where in the financial year immediately preceding the assessment year the assessee has made investments which are not recorded in the books of account, if any, maintained by him for any source of income, and the assessee offers no explanation about the nature and source of the investments or the explanation offered by him is not, in the opinion of the AO, satisfactory, the value of the investments may be deemed to be the income of the assessee of such financial year."
The undisputed facts in this case are that the assessee company has purchased certain shares at a price which is below the market value. There is no dispute of the fact that the price paid for the shares by the assessee company were the cost incurred by the purchaser. It is also not disputed that all these investments were recorded in the books of account. Under s. 69 only such value of the investments may be deemed to be the income of the assessee for the financial year, if they are not recorded in the books of account. Thus s. 69 is not applicable in this case. The first appellate authority possibly realising this difficulty has chosen to invoke s. 28(iv) and not to give a decisive finding as to whether s. 69 is applicable or not. We have to mention here that it is not the case of the Revenue that the assessee company has paid certain amount in excess of what is recorded in the books of account for the purchase of the shares. There is not even an allegation much less any evidence that the apparent consideration is not the real consideration. The only grouse of the Revenue authorities have is that the assessee company has purchased the shares at a price which much lesser than the market price. This, as already stated is not a disputed fact. Thus on these facts we hold that no addition is sustainable under s. 69.
21 ITA No.1175 & 1181/Hyd/2012M/s. A.S.P. Software Solutions Pvt. Ltd., Hyderabad 8.3 This brings us to whether the difference in question can be considered as income under s. 28 (iv) ? The section reads as follows :
"28. The following income shall be chargeable to income-tax under the head 'Profits and gains of business or profession',--
(iv) the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession."
Circular explaining the provisions of new s. 28(iv) at cl. 82 states as follows :
"Assessment of the value of any benefit or perquisite arising from business or exercise of a profession, as income from business or profession.
82. A new cl. (iv) has been inserted in s. 28, w.e.f. 1st April, 1964, by s. 7 of the Finance Act, 1964, under which the value of any benefit or perquisite (whether convertible in money or not) arising from business or the exercise of a profession will be chargeable to tax under the head 'Profits and gains of business or profession'. A corresponding amendment has been made to s. 2 (24), including the value of such benefit or perquisite in the definition of the term 'income' vide new sub-cl. (va) inserted in s. 2(24) by s.4(c)(i) of the Finance Act, 1964.
83. The effect of the above-mentioned amendment is that in respect of an assessment for the asst. yr. 1964-65 and subsequent years, the value of any benefit or amenity, in cash or kind, arising to an assessee from his business or the exercise of his profession, e.g., the value of rent free residential accommodation secured by an assessee from a company in consideration of the professional services as a lawyer rendered by him to that company, will be assessable in the hands of the assessee as his income under the head 'Profits and gains of business or profession'."
The condition of invoking s. 28(iv) is that the chargeable income of the assessee should arise from the business or in the exercise of profession. There must be a nexus between the business of the assessee and the benefit the assessee derived. The assessee in this case purchased certain shares at a certain price and was required to hold these shares for a period of three years. It is not in dispute that this was an investment made by the assessee company hence irrespective of the fact as to whether these investments were made in pursuance of the MoU or not, 22 ITA No.1175 & 1181/Hyd/2012 M/s. A.S.P. Software Solutions Pvt. Ltd., Hyderabad we are of the consideration opinion that such investments cannot be said to be a benefit arisen out of the business of the assessee. Moreover the assessee is the purchaser of the shares and there is no event that has taken place during the current accounting year which can be said to have resulted in any income being accrued or arisen to the assessee company during the year. If at all the assessee transfers the shares, then the benefit of profit in question can be brought to tax in those particular years. In all the case laws relied upon by the Revenue have been discussed by us while narrating their arguments and in these cases the tax has been levied on the transferor and not the transferee. The effect of this section has been explained by the CBDT in the above cited circular and from this it is clear that, when an assessee purchases goods or assets at a price lower than the market price, under whatever circumstances, the same cannot be brought to tax under s. 28(iv). The section covers fringe benefits that are availed in addition to consideration earned in carrying out a profession or while doing business. A benefit that is passed on by one party to another, in addition to cost or sale price, is covered in this proviso. This is clear from the example quoted. In our humble opinion, this section cannot be invoked under the present facts and circumstances.
8.4 Be it as it may the co-ordinate Bench of the Tribunal (F-Bench, Mumbai) in the case of Helios Food Improvers (P) Ltd. (supra) held that s. 28 is a charging section and takes into account the receipts of specified categories of all incomes as well as the receipts which could be generally construed as income in the ordinary sense. But the fact remains that all the receipts mentioned in s. 28 are inherently of income nature except in case of receipt under a given amount of insurance policy. It also states that s. 28(iv) refers to any benefit or perquisite and this means that such benefit or perquisite should be in the nature of income from the very beginning or it must have characteristics of income before it becomes chargeable at a later stage if the original transaction is completed as designed. The Bench further observed that the words 'benefit' or 'perquisite' have been used in the said section and have to be read together and would draw colour from each other. Normally the term 'perquisites' denotes meeting out of an obligation of one person by another person either directly or indirectly or provision of some facility or amenity by one person to another person or from the very beginning the person providing such facility or concession knows that whatever is being done is irretrievable to him, as it has been granted to a person as a privilege or right of that person. Thus, it was concluded that the word 'benefit' has to be interpreted in the same manner, that is, at the time of execution of the business transaction one party should give to the other party an irretrievable benefit or advantage, as an obligation or facility or a concession. In our 23 ITA No.1175 & 1181/Hyd/2012 M/s. A.S.P. Software Solutions Pvt. Ltd., Hyderabad opinion, only if the seller had incurred an expense or a liability or had provided a facility to the purchaser, then the value in cash of such expenses or benefit or perquisite shall be treated as income. In this case, the seller has not incurred any expenses or liability or has provided a facility. It sold its shares at a reduced price. "
Respectfully following the above, we are of the opinion that the CIT(A) has traversed beyond the jurisdiction to re-determine the sale price, when the Assessing Officer himself has not re-determined the sale price, nor considered the transactions as bogus. In view of this, we are not in a position to uphold the order of the CIT(A) in re-determining the sale price and confirming the addition of Rs.6,43,20,260. Therefore, the assessee's grounds No.1, 6 and 7 on this issue are allowed.
28. Coming to the other contentions about the jurisdiction for initiation of proceedings under S.153C, these issues have become academic in nature. However, as seen from the additional grounds raised, and paper- book filed, the Assessing Officer has issued a notice under S.153A when the assessee is not a searched party. Revenue did not bring out anything on record to submit that the notice under S.1533C has been issued. As seen from the notice itself, this notice was issued/typed as a notice under S.153C. This was corrected by way of ink to be that of 153A. The learned Departmental Representative was specifically asked to enquire and place on record, whether the notice was issued under S.153A or under S.153C. However, no information was placed on record. As seen from the order placed on record, there is no finding by the Assessing Officer who completed the search assessment, that these documents pertained to the assessee. Nor there is anything in the proceedings initiated that these are required to be considered in the case of the assessee. Therefore, on the preliminary issue of jurisdiction itself, as the assessee is not a searched party, notice under 24 ITA No.1175 & 1181/Hyd/2012 M/s. A.S.P. Software Solutions Pvt. Ltd., Hyderabad S.153A cannot be issued, and the assessee having been issued a notice under S.153A, proceedings under S.153C cannot be completed.
29. Even otherwise, as seen from the facts placed on record, the documents so seized are nothing but annual report of the assessee company along with the Memorandum of Understanding of debt assignment and share certificates. These do not establish any incriminating evidence of undisclosed income, so as to enable the Assessing Officer to invoke the provisions of S.153C. As stated, the assessee has already filed a return of income, which was processed under S.143(1)(a). The return was filed on 22.9.2008 for assessment year 2008-09 and the search occurred on 20th August, 2009. In fact, there was time to issue notice under S.143(2) itself in the assessee's case immediately. Be that as it may, as per evidence placed on record, we find that notice was issued under S.153A on the assessee, which is not a searched party and the assessment was completed under S.153C. Therefore, prima facie, there is no jurisdiction for the Assessing Officer to complete the assessment in the way he did. Therefore, the additional grounds raised by the assessee has merit, and the same are required to be allowed.
30. The next contention raised by the assessee with reference to the jurisdiction was that there was no incriminating material and the documents found and seized cannot be considered under the provisions of S.153C. This issue along with the contention that the satisfaction was not recorded need not be considered at present and can be examined in an appropriate case. As stated above, on facts and on jurisdiction under S.153C, the orders passed by the Assessing Officer and as partly confirmed by the CIT(A) are not correct, and therefore, the assessee's contentions on these aspects are to be allowed.25 ITA No.1175 & 1181/Hyd/2012
M/s. A.S.P. Software Solutions Pvt. Ltd., Hyderabad
31. Another contention raised was that the transfer of shares cannot be considered as business income. This contention is only academic in nature, as the assessee itself has shown debt assignment as a business transaction and offered the profit and the CIT(A)'s finding that the income has to be assessed as business income are to be upheld. Consequently, the shares received in lieu of the debt become stock in trade and sale thereof may result in business loss. The Assessing Officer as well as the assessee treated the same as business transactions. Therefore, the ground 5 raised by the assessee that it cannot be treated as business income cannot be accepted on the facts of the case.
32. However, since the gain on the debt assignment gets set off by the loss in the sale of shares, what the assessee has offered as business income has to be accepted as appropriate one. In view of this, grounds raised by the assessee on these issues are allowed.
33. Ground No.8 raised by the assessee is with reference to levy of interest under S.234B and 234D are consequential in nature and do not require any adjudication. The Assessing Officer is directed to follow the provisions of the Act, while levying interest under these provisions.
34. In the result, assessee appeal is partly allowed.
35. As for the Revenue's appeal, ITA No.1175/Hyd/2012, consequent to the above findings given with regard to the merits of the case and also on the point of jurisdiction, we do not find merit in the revenue's grounds. Even though the Revenue's ground says that the assessee has received interest of Rs.5,30,23,056, nowhere it is established that the assessee has received any interest, and hence, the ground raised in that behalf cannot be 26 ITA No.1175 & 1181/Hyd/2012 M/s. A.S.P. Software Solutions Pvt. Ltd., Hyderabad accepted. Even otherwise, since the assessee's grounds are allowed, and as it was held that jurisdiction in assuming jurisdiction under S.153C is bad in law, there is no merit in the grounds of the Revenue in the cross-appeal. The same are accordingly rejected. Appeal of the Revenue, being ITA No.1175/Hyd/2012 is dismissed.
36. To sum up, appeal of the assessee's appeal being ITA No.1181/Hyd/2012 is partly allowed, Revenue's appeal being ITA No.1175/Hyd/2012 is dismissed.
Order pronounced in the court on 18.1.2013
Sd/- Sd/-
(Saktijit Dey) (B.Ramakotaiah)
Judicial Member Accountant Member
Dated/- 18th January, 2013
Copy forwarded to:
1. M/s. A.S.P. Software Solutions Pvt. Ltd., (Presently known as M/s. Venkateswara Financiers Hyderabad Pvt. Ltd.), 8-2- 269/8/90, Plot No.90, Sagar Co-op. Housing Society, Road No.2, Banjara Hills, Hyderabad 500 034.
2. Dy. Commissioner of Income-tax Central Circle 6, Hyderabad
3. Commissioner of Income-tax(Appeals) I, Hyderabad
4. Commissioner of Income-tax-I, Hyderabad
5. Departmental Representative, ITAT, Hyderabad. B.V.S.