Income Tax Appellate Tribunal - Mumbai
Jayneer Capital Private Limited, ... vs Deputy Commissioner Of Income Tax, ... on 28 February, 2019
IN THE INCOME TAX APPELLATE TRIBUNAL "F", BENCH MUMBAI BEFORE SHRI R.C.SHARMA, AM & SHRI AMARJIT SINGH, JM ITA No.4477/Mum/2017 (Assessment Year :2012-13) M/s. Jayneer Infrapower & Vs. Deputy Commissioner of Multiventures Pvt. Ltd., Income Tax, Range 6(3)(1) (Formerly known as Jayneer Room No.506, 5 t h Floor Capital Pvt. Ltd.,) Aayakar Bhavan th 18 Floor, A Wingh Mumbai - 400 020 Marathon Futurex, N.M. Joshi Marg, Lower Parel, Mumbai - 400 013 PAN/GIR No.AAACJ1688G (Assessee) .. (Respondent) ITA No.4321/Mum/2017 (Assessment Year :2012-13) Deputy Commissioner of Vs. M/s. Jayneer Infrapower & Income Tax, Range Multiventures Pvt. Ltd., 6(3)(1) (Formerly known as Jayneer th Room No.506, 5 Floor Capital Pvt. Ltd.,) Aayakar Bhavan 18th Floor, A Wingh Mumbai - 400 020 Marathon Futurex, N.M. Joshi Marg, Lower Parel, Mumbai - 400 013 PAN/GIR No.AAACJ1688G (Assessee) .. (Respondent) ITA No.2035/Mum/2017 (Assessment Year : 2013-14) Deputy Commissi oner of Vs. M/s. Jayneer Capital Pvt.Ltd., Income Tax, Range 135, Continental Building, 6(3)(2) Dr. Annie Besant Road th Room No.503, 5 Floor Worli, Mumbai - 400 018 Aayakar Bhavan Mumbai - 400 020 PAN/GIR No.AAACJ1688G (Assessee) .. (Respondent) Assessee by Shri Perely J Pardiwala / Shri 2 ITA No.4477/Mum/2017 and other two appeals M/s. Jayneer Capital Pvt. Ltd., Madhur Agarwal Revenue by Shri Jai Bhansali Date of Hearing 14/11/2018 & 27/02/2019 Date of Pronouncement 28/02/2019 आदे श / O R D E R PER AMARJIT SINGH (J.M):
These are the cross appeals filed by assessee and revenue against the order of CIT(A)-12, Mumbai dated 23/03/2017 for A.Y.2012-13 & 2013-14 in the matter of order passed u/s. 143(3) of the IT Act.
2. Following grounds have been taken by assessee in the A.Y. 2012-
13.
1. Addition on account of transfer of shares a. The Commissioner of Income-tax (Appeals) (hereinafter referred to as "the CIT(A)") erred in upholding the action of the Assessing Officer (hereinafter referred to as "the AO") in treating the transaction of transfer of shares as a colorable device and consequently directing him to tax the transaction under capital gain provision after assigning the market value of the shares as the sales consideration. The reasons given by her for doing so are wrong, contrary to the facts of the case and provisions of law.
b. The CIT(A) erred in taxing the transaction of transfer of shares on the reasons being in the nature presumptions, assumptions and surmises and in contravention of the principles and provisions of law. c. The CIT(A) failed to appreciate that there is no provision in the Income-tax Act, 1961 (hereinafter referred to as "the Act") for substituting the fair market value of the shares as sale consideration for computing capital gains. d. Additionally, the CIT(A) failed to appreciate that the transfer of certain shares were made by the Assessee Company without consideration, being a transaction of gift and therefore cannot be regarded as transfer of capital asset for the purpose of capital gains taxation, as provided in section 47(iii) of Act. e. Additionally, the CIT(A) failed to appreciate that in the absence of consideration, the computation mechanism fails rendering the transaction non- taxable 3 ITA No.4477/Mum/2017 and other two appeals M/s. Jayneer Capital Pvt. Ltd.,
2. Disallowance of interest amounting to Rs. 57,25,64,708/- u/s 36 (l)(iii) of Act a. The CIT(A) erred in upholding the disallowance of proportionate interest expenses amounting to Rs. 57,25,64,7087- related to advances in the nature of share application money given to wholly owned subsidiary 7 group concerns even though, the said advances were given out of commercial expediency. The reasons given by her for . doing so are wrong, contrary to the facts of the case and provisions of law.
3. Disallowance u7s 14A read with Rule 8D of the Income-tax Rules, 1962 (hereinafter referred to as "the Rules") a. The Ld. CIT(A) erred in law and facts in confirming the addition of Rs. 8,29,19,798/-u/s 14A of the Act r.w. Rule 8D. The reasons given by her are contrary to the facts of the case and provisions of the Act. b. The Ld. CIT(A) failed to appreciate that the additional disallowance of interest expenditure under section 14A of the Act r.w. Rule 8D of Rs. 18,64,68,8997- ought to be deleted in the absence of dividend income and not because the same has been disallowed under section 36(l)(iii) of the Act , . .
4. Addition u/s 68 of the Act amounting to Rs. 34,99,65,000/- a. The CIT(A) erred in law and facts in upholding the action of the AO in making an addition of Rs. 34,99,65,000/-, being money received towards issue of optionally convertible preference shares during the relevant previous year, as unexplained cash credit u/s 68 of the Act, to the income of the Assessee even when the nature and source of such credit stood duly explained and proved. The reasons given by her for doing so are wrong, contrary to the facts of the case and provisions of law. ..., b. The CIT(A) erred in upholding the action of the AO in making addition of Rs. 34,99,65,000/- u/s 68 of the Act without appreciating that there was no requirement to explain "source of source".
5. The above grounds/sub grounds are without prejudice to each other.
6. The Assessee craves leave to add, alter or amend all or any of the grounds of appeal.
3. Following grounds have been taken by Revenue in the A.Y. 2012-
13.
1. 'On the facts and circumstances of case and in law, the Ld. CIT (A) erred in deleting the addition of Rs. 57,90,33,060/-, without appreciating the fact that the very nature of transfer of shares of Dish TV India Ltd. and WWIL clearly proves that the assessee company cannot take cover u/s 47(iv) of the Act, and the very 4 ITA No.4477/Mum/2017 and other two appeals M/s. Jayneer Capital Pvt. Ltd., creation of relationship of holding company and subsidiary company between colluding parties itself was part of a larger colourable device, as established by the A.O. in the Assessment Order."
2. "On the facts and circumstances of the case and in law , the Ld. CIT(A) erred in treating the transfer of shares as transfer of capital assets and directing the A.O, to compute Capital Gain as per the Act anderred in not considering that the transfer of shares of Dish TV India Ltd and WWIL has been correctly worked out by the A.O. at Rs. 57,90,33,060/- under "income from other sources"
u/s 56(1) of the Income Tax Act instead of "NIL" consideration taken by the assessee."
3. "On the facts and circumstances of the case and in law the Ld. CIT (A) erred in deleting the entire disallowance made by A.O. u/s 14A r.w. Rule 8D of the Income tax Act, 1961, without appreciating the fact that even if entire finance cost has been disallowed u/s 36(i)(iii), disallowance @ 0.5 % of the average assets amounting to Rs. 1,52,13,1OO/- and direct expenditure has to be considered for disallowance u/s 14A r.w. Rule 8D."
4. "On the facts and circumstances of the case and in law, the Ld. CIT (A) erred in deleting the disallowance of Rs. 2,09,73,983/- u/s 14A r.w. Rule 8D without appreciating the fact that interest expenses incurred are indirectly relatable to earning of exempt income, and have to be considered for disallowance."
5. "The Assessee prays that the order of the CIT (Appeals) on the above grounds be set aside and that oj the AO be restored. "
6. "The Assessee craves leave to amend or alter any ground or to submit additional new ground which may be necessary. "
4. Following grounds have been taken by the Revenue in the A.Y.2013-14.
1. On the facts and in the circumstances of the case and in law, the Ld.CIT(A) erred in deleting the disallowance of Rs. 1,62,25,661/- made u/s.14A r. w. Rule 8D and thus ignoring the CBDT Circular no. 5/2014 dated 11.02.2014 that clarifies that disallowance u/s 14A has to be made irrespective of the fact whether any exempt income has been earned during the year by the assessee or not
2. The Assessee prays that the order of the CIT (Appeals) on the above grounds be set aside and that of the AO be restored.
3. The Assessee craves leave to amend or alter any ground or to submit additional new ground, which may be necessary.5
ITA No.4477/Mum/2017 and other two appeals
M/s. Jayneer Capital Pvt. Ltd., A copy of the order of the CIT(A) was received on 03.02.2017 and the last date for filing of appeal is 03.04.2017.
5. Rival contentions have been heard and perused. Facts in brief are that the assessee company is a registered NBFC and also into the business of finance, investing and trading in shares and securities. During the A.Y.2012-13 the assessee had earned interest income and incurred finance & miscellaneous costs. The assessee filed its return of income on 30.09.2012, declaring total income at loss of Rs. 49,07,28,352/- after disallowing Rs. 44.58 Crores loss on sale / transfer of shares Rs. 5.68 Cr. U/s 36(1)(iii) of the Act, Rs. 8.29 Cr. u/s 14A of the Act and other expenses. The assessment u/s 143(3) of the Act was completed vide order dated 31.03.2015 after making following additions/ disallowances.
Sr. No. Particulars Amounts (Rs)
1 Taken wrong figure of returned loss for 31,46,05,529/-
computation (49,07,28,352-17,61,22,832/-)
2. Addition u/s 56(1) being market value of shares 57,90,33,060/-
alleged to have been transferred at nil
consideration
3 Disallowance out of expenses u/s 37
- Rates and Taxes 90,000
- Legal & Professional Fees 6,90,000
4 Further disallowance of interest u/s 36(1)(iii) 625,30,04,708/-
5 Further disallowance u/s 14A 20,18,96,603/-
- Interest of Rs. 18,79,39,588
- Expenses of Rs. 1,39,57,015
6 Further addition u/s 68 on account of pref. 34,99,65,000
shares issued at premium - premium amount
6. It was argued by Ld. AR that the assessee had filed the return of income declaring loss of Rs. 49,07,28,352/- as evident from the records. 6 ITA No.4477/Mum/2017 and other two appeals
M/s. Jayneer Capital Pvt. Ltd., The assessee did not revise its return of income of the year hence figure of loss to Rs. 17,61,22,823/- taken by Ld. AO as per revised return of income is wrong hence assessed income computed is higher by Rs. 31,46,05,529/- (49,07,28,352 - 17,61,22,823/-).
7. With regard to addition of Rs.57,90,33,060/- u/s. 56(1), we found that during the year the assessee sold/transferred listed shares of wire and wireless (India) Ltd and Dish TV India Ltd to their group concerns for total consideration of Rs. 85.80 Cr against book cost of Rs. 127.01 Cr and suffered loss on such sale / transfer which was disallowed by the assessee in the computation of total income. The Ld. AO observed that the assessee has transferred these shares at Nil consideration under colorable device to evade taxes. Hence, the Ld. AO computed the income on sale / transfer of such listed shares at market value of Rs. 57.90 Cr by taking Nil value as cost of acquisition as computed in the assessment order. The Ld. AO assessed alleged income of Rs. 57.90 cr u/s 56(1) of the Act as income from other sources. The Ld. AO has taken purchases consideration at Nil and taken sale consideration by estimating market value of Rs. 57.90 Cr, while the cost of acquisition of shares is Rs. 127.01 Cr and sale consideration is Rs. 85.80 Cr. Hence, the whole addition so made by A.O. is without appreciating the facts.
8. The A.O also disallowed interest u/s 36(1)(iii) of the Act of Rs. 625,30,04,708/-. In this regard we observed that During the year the 7 ITA No.4477/Mum/2017 and other two appeals M/s. Jayneer Capital Pvt. Ltd., assessee had incurred interest expenditure of Rs. 63,11,63,059/- i.e. 63.11 Crores which was wrongly stated as 631.16 Cr by Ld. AO. Out of the above interest amount expenses the assessee suo-moto disallowed Rs. 8,16,63,713/- u/s 14A and Rs. 5,85,95,292/- u/s 36(1)(iii) of the Act. Hence the Assessee has actually claimed interest expenses of Rs. 49,09,04,054/- (i.e) 63,11,63,059/- - 14,02,59,005/-). The Ld. AO stated that assessee has incurred interest expenses of Rs. 631.16 Cr (correct figure of Rs. 63.11 Cr while working out disallowance of interest u/s 14A) and disallowed Rs. 625,30,04,708/- (i.e Rs. 631.16 Cr less Rs. 5.85 Cr) u/s 36(1)(iii) of the Act on following grounds.
a. The assessee has used borrowed funds to advance share application money to Pan India infraprojects Pvt Ltd (WOS) and Mumbai Football Club Pvt Ltd.
b. There is neither business connection nor commercial expediency in giving said sum to abovementioned parties. Thus entire interest expenditure is disallowable.
09. With regard to disallowance amounting to Rs. 1,65,85,334/- u/s 14A of the Act. We observe that the majority of investments so made by the Assessee are in group concerns or subsidiary companies. The assessee has not earned any exempt income from these investments. The assessee has incurred total interest expenses of Rs. 63,11,63,059/- out of which Rs. 14,02,59,005/- (Rs. 8,16,63,713/- u/s 14A and Rs. 5,85,95,292/- u/s 36(1)(iii)) has been disallowed in the computation of total income. The assessee had excluded investments in subsidiaries for arriving at average value of investments to compute disallowance u/s 8 ITA No.4477/Mum/2017 and other two appeals M/s. Jayneer Capital Pvt. Ltd., 14A out of total expenses of Rs. 13,90,788/- (Rs. 9,09,401-4,81,387/-) incurred for the year as per profit and loss account. The assessee suo- moto disallowed Rs. 12,56,085/- u/s 14A and Rs. 1,34,703/- u/s 37/40 in the computation of total income hence entire expenses of Rs. 13,90,788/- The Ld. AO computed disallowances of Rs. 20,18,96,603/- u/s 14A of the Act as per Rule 8D as under on the basis of average value of investments including investments made in subsidiaries and without excluding Rs. 5.86 Cr disallowed u/s 36 (1)(iii).
Particulars Amount in Rs. As per Rule 8D(i) - Direct interest cost 14,70,689/- As per Rule 8D(ii) - proportionate interest expenditure 26,81,32,612/-
As per Rule 8D(iii) - Administrative expenditure computed at 28,48,16,401/- 0.5% of average investment (Total expenses claimed for the year Rs. Nil) Less: Disallowed in computation of total income 8,29,19,798/- (8,16,63,713/-+12,56,085/-) Total 20,18,96,603/-
10. A.O also made addition u/s 68 of the Act amounting to Rs. 34,99,65,000/-. In this regard we found that during the year the assessee has allotted 350 optionally convertible preference shares to Pan India infrastructures Pvt. Ltd. at Rs. 10 Lacs per shares having face value of Rs. 100 at premium of Rs. 9,99,900/- per share. During the course of hearing before the AO the assessee submitted following documents of Pan India infrastructures Pvt. Ltd. (a) share certificates;
(b) Bank account; and (c) Ledger account of assessee in the books of Pan India Infrastructures pvt ltd. However, the Ld. AO made addition of 9 ITA No.4477/Mum/2017 and other two appeals M/s. Jayneer Capital Pvt. Ltd., said Rs. 34,99,65,000/- u/s 68 of the Act being amount representing share premium on following grounds.
(a) The assessee has filed to substantiate the amount of share premium with documentary evidence, hence it is treated as unreasonable;
(b) The earning per share (EPS) of the assessee is not encouraging enough to justify the share premium charged by it on the preference shares.
11. By the impugned order the CIT(A) confirmed the addition on account of disallowance of interest u/s 36(1)(iii) of the Act, disallowance u/s 14A Rule 8D of the IT Rules addition made u/s 68 of the Act.
However, the CIT(A) has deleted major part of the addition made on account of transfer of shares to Dish TV India Ltd and WWIL amounting to Rs. 57,90,36,060/- part of disallowance made u/s 14A of the Act. Against this order of CIT(A) both the assessee as well as Revenue are in appeal before us.
12. We have considered the rival contentions and carefully gone through the orders of the authorities below. Ground of appeal No. 1 taken by the assessee and ground of appeal Nos. 1 and 2 of the Revenue relates to addition on account of transfer of shares.
13. The above issue has been dealt with by the A.O on page Nos. 2 to 13, and by the CIT(A) on page Nos. 5 to 31, of their respective orders. The above ground of appeal in cross appeals arises out of sale of certain 10 ITA No.4477/Mum/2017 and other two appeals M/s. Jayneer Capital Pvt. Ltd., shares by assessee to its group companies at cost and transfer of certain shares to group companies at a nil consideration. While the assessee has incurred loss out of these transactions, the same is not claimed in the computation of income. The Assessing Officer has considered these transactions to be colourable device and taxed the resultant profit under the head income from other sources after considering the market value of the shares as selling price. The CIT (A), while upholding the stand of the Assessing Officer that the transactions are colourable device, held that the resultant profit should be taxed under the head capital gain. Aggrieved by the above findings, both the parties are in appeal, While revenue is contending that the gain is taxable under the head income from other sources, the assessee is contending that (i) the transaction is not colourable device, (ii) the selling price cannot be replaced by the market value and (iii) the sale of shares without price is a gift and not transfer u/s, 47(iii) of the Act.
14. The background facts of the transactions under consideration are as follows. During the year under consideration, the assessee has transferred the following shares.
Sr. Particulars Purchaser No. of Cost of Sale Gain/ (Loss)
No. shares acquisition consideration
1 Wire& Essel 1,03,31,658 1,96,31,05,502 NA (Gift) (19,63,01,502)
Wierless Corporate
India Resources P.
Ltd. Ltd.
11
ITA No.4477/Mum/2017 and other two appeals
M/s. Jayneer Capital Pvt. Ltd.,
2 -- 1,28,26,555 2437,04345 NA (Gift) (24,37,04,545)
3 Esscl 65,00,000 12,35,00,000 12,35,00,000 -
Business
Process Ltd.
4 Essel 1,00,00,000 19,00,00,000 19,00,00,000 -
Busines
process Ltd.,
5 -"- 2,71,73,445 51,62,95,455 -
51,62,95,455
Total 6,68,31,658
1 Dish TV Esstl 10,32,125 1,74,619 2,81,97,655 2,80,23,486
India Ltd., Corporate
Resources Pvt
Ltd.,
2 Premier 2,100 37,800 "NA (Gift) (37,800)
Finance &
Trading Co.
Ltd.,
3 Direct Media 3,050 83,326 NA (Gift) (83,426)
Distribution
Ventures P.
Ltd.,
Total 10,37,275
15. From the record we found that the resultant loss has been disallowed by the assessee itself in its computation of income. The Assessing Officer has analyzed the above transactions. The Assessing Officer called for certain details from the assessee and asked for the 12 ITA No.4477/Mum/2017 and other two appeals M/s. Jayneer Capital Pvt. Ltd., rationale behind the above transactions as well as the reason why the gain arising out of these transactions should not be brought to tax.
16. From the record we found that the assessee vide its letter dated 16.02.2015 (page No. 17 of paper book No, 1) submitted that the said transfers were made as a part of internal restructuring with a view to consolidate the media assets of the group. The assessee further submitted vide letter dated 28.03.2015 (page No. 19 of PB No, 1) that the transfer of capital asset without consideration is a gift and the same is not regarded as 'transfer' u/s. 47(iii) of the Act. Thus, the gift of shares is not liable to tax u/s. 45 of the Act, It was further submitted that in the absence of sale consideration, the computation mechanism fails and the transaction cannot be brought to tax in view of the decision of the Hon'ble Supreme Court in the case of CIT v. B.C. Srinivasa Shetty (128 ITR 294). It was also submitted that the Assessing Officer cannot substitute the sale consideration by fair market value in the absence of any such provision under the Act. Reliance was placed upon the decisions of the Hon'ble Supreme Court in the case of CTT v, George Henderson and Co. Ltd, (66 ITR 622) and CIT v, Gillanders Arbuthnot & Co. (87 ITR 407)
17. However, the Assessing Officer did not agree with the submission of the assessee and held that the fair market value of the shares is to be 13 ITA No.4477/Mum/2017 and other two appeals M/s. Jayneer Capital Pvt. Ltd., substituted for sale consideration and thereby made the addition of Rs. 57,90,33,060/-. His detailed reasonings can be summarized as under:
(i) The assessee has very minimal paid up capital and has huge accumulated losses as well as borrowing. It has also advanced huge amounts to related parties and subsidiaries and have substantial investments in subsidiaries and group companies.
(ii) The shares of assessee-company are held by the shareholders who are all family members.
(iii) Certain details regarding the above transactions were called for, however, the same were not submitted by the assessee.
(iv) There are several companies and entities in the group and similar transfer of shares have been carried out in many other companies.
(v) The modus operandi of transfer of shares is same in all the group companies wherein the transferor becomes holding company of transferee and thereafter the shares worth crores of rupees are transferred at nil consideration,
(vi) The inter se status of the companies keep on changing very quickly. The companies are amalgamated after receiving the shares of other group companies. The accounting treatment is given as per the Court approved scheme.14
ITA No.4477/Mum/2017 and other two appeals
M/s. Jayneer Capital Pvt. Ltd.,
(vii) Although the stated purpose of restructuring is consolidation of media assets or business, the real purpose is to divide the business amongst the family members. This has been done after getting the legal stamp of approval.
(viii) Some of such instances of share transfer of group companies have been described, wherein the transaction of shares of Zee News Ltd (para 4.1), Dish TV (para 5.1), Wire & Wireless India Ltd. (City Cable) (para 6.1), Zeel (para 7.1), Zee Learn (para 8.1), Essel Prepack (para 9,1) and Jayneer Capital (para 10-1) have been discussed) The decisions of the Supreme Court in the case of CIT v, Durga Prasad More (82 ITR 540) and McDowell & Co. Ltd. v. Commercial Tax Officer (154 ITR 148) were invoked and it was held that the transaction is a colourable device. The Assessing Officer also held that the resultant gain is to be taxed under the head 'income from other sources'. The Assessing Officer finally adopted the market value of the shares and calculated the income at Rs.57,90,33,060/- as under.
Shares of No. of shares Average Market value Remarks
price
Dish TV Tndia 10,37,275 75 7,77,95,625 10,32,125 shares were
Ltd., were transferred at a profit
while only 5,150 shares
were gifted.
Wire & Wireless 6,68,31,658 7.5 50,12,37,435 4,36,73,445 shares were
India Ltd., transferred at cost while
15
ITA No.4477/Mum/2017 and other two appeals
M/s. Jayneer Capital Pvt. Ltd.,
only 2,31,58,213 shares
were gifted.
Total 57,90,33,060
18. Against the above addition by AO, assessee approached to CIT(A).
19. It was pleaded before the CIT (A) that the transfer of shares made without consideration is gift and, therefore, the same cannot be taxed under the provisions of the Act. It was explained that the transaction was part of internal restructuring exercise carried out for consolidation / rationalization of various media assets. In support of this, the copies of Memorandum and Articles of Association as well as DEMAT slip of share transfers were relied upon. It was pleaded that the transaction cannot be considered as colourable device and the principle laid down by the Supreme Court in the case of McDowell and Co. Ltd, is not applicable. The order of the Mumbai Bench of the Tribunal in the case of DP World Pvt. Ltd. v. DCIT (162 TTJ 446) was relied upon to contend that the transaction of gift cannot be brought to tax. It was also submitted that in the absence of selling price, the capital gain cannot be calculated and, hence, computation machinery falls. It was further contended that the market value cannot be substituted for sale consideration as there is no such provision in the Act. As regards the applicability of S. 56 of the Act, it was submitted that the gain arising 16 ITA No.4477/Mum/2017 and other two appeals M/s. Jayneer Capital Pvt. Ltd., out of transfer of capital asset cannot be brought to tax under the head income from other sources.
20. By the impugned the CIT(A) held that the transactions of transfer of shares were in the nature of colourable device. He was also of the view that the transaction of transfer of shares without consideration cannot be said to be gift. He found that certain field in the DEMAT siips have not been properly filled up to categorize the transaction as a gift nor any gift deed was submitted by the assessee. The CIT (A) also observed that the assessee has not furnished any evidence to establish that the transaction was a voluntary act of the donor. He distinguished the case laws relied upon by the assessee stating that the facts are different.
21. The ld, CTT (A) further observed that even if the claim of assessee that transaction is covered u/s. 47(v) of the Act is correct, it has violated S. 47A of the Act since Essel Corporate Resources P. Ltd. has ceased to be the holding company of the assessee. He has pointed out that there are certain transactions of receiving the shares from the group companies and giving the shares to the group companies. According to him, these transactions are interconnected to each other. According to the CIT (A), these are exchange of shares and, therefore, the market value of shares have been correctly taken by the Assessing Officer. He was further of the view that the gain, however, should be taxed under 17 ITA No.4477/Mum/2017 and other two appeals M/s. Jayneer Capital Pvt. Ltd., the head 'capital gain' and not under the head 'income from other sources' as the gift is arising out of transfer of capital asset. He also held that cost of acquisition of shares should be reduced from selling price. Thus, the CIT (A) upheld the addition but directed the Assessing Officer to give deduction on account of cost of acquisition and tax the gain under the head 'capital gain' instead of 'income from other sources'. The Assessing Officer has since given the effect to the above order of the CIT (A) and the taxable capital gain has been reworked at Rs. 2,65,124.
22. It was contented by the ld. AR that the assessee has transferred the shares of Wire & Wireless India Ltd. and Dish TV India Ltd. to its group companies. These transfers have taken place either at cost or without consideration. It is submitted that both the lower authorities have ignored the fact that the transfers have been effected pursuant to internal restructuring exercise carried out by the assessee. Both the authorities have further erred in assigning the market value as a sale consideration for the purpose of determining the income. It is submitted that there is no such enabling provision under the Act to substitute the market value in place of actual consideration. As per ld A.R., the ld. CIT (A) has correctly held that the transfer of shares is a transfer of capital asset and the gain from which is chargeable to tax u/s. 45 of the Act. The computation of gain, for this purpose, is to be done as prescribed in S. 48 of the Act which provides for deduction of cost of acquisition from 18 ITA No.4477/Mum/2017 and other two appeals M/s. Jayneer Capital Pvt. Ltd., 'full value of consideration'. The phrase 'full value of consideration' has received the judicial interpretation in series of decisions by various High Courts as well as Supreme Court. In the case of the CIT v/s, Morarjee Textiles Ltd. (ITA 738 of 2014) (Bom.), on the facts similar to the present case, wherein the question posed was whether fair market value of shares transferred can be taken as sale consideration for computation of long term capital gain, the Hon'ble Bombay High Court held as under:
"4. Regarding question no. (ii):-
(a) The issue which arises herein for consideration is whether it is open to the Assessing Officer to substitute the 'full value of consideration1 received on sale of shares by its 'fair market value' in the subject Assessment Year. The impugned order of the Tribunal allowed the respondent-assessee's appeal by inter alia holding that the reliance by the Revenue on Section 2 (22B) of the Act is not justified. This is for the reason that there is no provision under the Act which would permit the Assessing Officer to substitute the 'full value of consideration' received on sale of shares by 'fair market value'. The only provision in the Act at the relevant time allowing substitution of consideration received by the market value was Section 50C of the Act. Section 50C of the Act deals only with substitution of full consideration received by 'fair market value' in respect . of land and/or buildings. The impugned order makes a reference to Section 5OD of the Act which provides for substitution of full value of consideration received / accruing on a transfer of a capital asset being substituted by a fair market value. However this came into force only with effect from 1st April 2013. Therefore it cannot he relied upon for the subject Assessment year. The impugned order of the Tribunal further placed reliance upon the decision of its Co-ordinate bench in the case of MGB Shareholders Benefit Trust (Income Tax Appeal No. 316/ Mum/2009) rendered on 26th November, 2009 in case of a group company of the respondent assessee on a similar issue of revaluation of shares by substitution of full value of consideration by fair market value and held the same to be impermissible,
(b) The grievance of the Revenue before us is that these transactions are all between companies belonging to the same group. Therefore it is urged that the transaction are colourable transaction and different considerations mould apply.
(c) At the hearing of the admission, the Revenue did not point out any facts which would evidence that the transaction was not genuine. In such a case where the genuineness is not disputed with any evidence, it is not 19 ITA No.4477/Mum/2017 and other two appeals M/s. Jayneer Capital Pvt. Ltd., open to discard the document and / or transaction on the basis of some supposed object / intent. In the present facts the Revenue accepts the documents but only substitutes the consideration. Therefore, the issue is whether such substitution of full consideration received by fair market value of the asset is permissible. As held by the Tribunal at the relevant time there was no power vested in the authorities under the Act to substitute a full value of consideration received for sale of shares by fair market value in respect of stocks and shares. The power to substitute full consideration with fair market value in respect of shares came into the statute only on introduction of Section 50D with effect from 1" April 2013. Moreover, such a power under Section 50D of the Act is only to be exercised if the Assessing Officer comes to a finding that the consideration received is not ascertainable or cannot be determined.
Moreover the decision of the Co-ordinate bench of the Tribunal in the case of MGM Shareholders Benefit Trust (Supra) on identical facts situation has been accepted by the Revenue, as no appeal from the same has been filed by the Revenue.
(d) In the above view, the question as formulated does not give rise to any substantial question of law. Thus not entertained."
23. It was also argued by the Ld. AR that notional value of sale consideration can only be taken when it is specifically provided in the Act for e.g. section 50C of the Act which provides for a deemed full value of consideration. As per the ld. A.R. there is no such provision applicable in the present case and accordingly the fair market value cannot be taken as the sale consideration.
24. It was further argued that the transfer in the nature of gift are outside the purview of capital gain provisions. Transfer of shares, by way of gift, are exempt from the provisions of capital gain by virtue of provisions of Sec.47(iii) of the Act which read as under;
Transactions not regarded as transfer.
47. Nothing contained in Section 45 shall apply to the following transfer :
(i) ..................20
ITA No.4477/Mum/2017 and other two appeals
M/s. Jayneer Capital Pvt. Ltd.,
(ii) [*****]
(iii)any transfer of a capital asset under a fit or will or an irrevocable trust;
25. Reliance was placed on the decision of the Hon'ble Gujarat High Court in the case of the Prankriya Pharmacem Vs ITO (238 Taxman 185) wherein it was held that in case where an assessee gifted its shares to its sister concern, such transaction would fall within the ambit of Sec 47(iii) and therefore such a transaction is exempt from capital gain. Accordingly, the transfer made as gift without consideration are not taxable under the provisions of capital gains.
26. Now we deal with specific objections raised by the A.O.
(i) As regards the size of capital and huge losses and borrowing, we observe that this fact has no bearing on taxation of gain arising out of transfer of shares.
(ii) Similarly the composition of shareholders also has no bearing on the issue under consideration.
(iii) As regards the alleged non-submission of details, we found that letter dated 25,03.2015 was filed before the Assessing Officer. However, then the details has no much bearing on the issue under consideration.
21ITA No.4477/Mum/2017 and other two appeals
M/s. Jayneer Capital Pvt. Ltd.,
(iv) As regards the transfer of shares by other group companies, we found that this also could not have any bearing on the issue under consideration. Whether the market value can be substituted for actual consideration, is a question to be decided on the basis of the provisions of the Act.
(v) The modus operandi of transfer of shares in other group companies do not have any bearing on the issue under consideration. In any case, if transferor becomes the holding company of transferee company, the provisions of S. 47(iv) of the Act would be applicable and the capital would not be charged as per the provisions of the Income-tax Act. If there is no charge of tax as per the provisions of the Act, the Assessing Officer cannot complaint about the same. In any case, the violation of the pre-condition of S. 47(iv) of the Act invites the tax liability as prescribed u/s. 47A of the Act and, therefore, the transaction of transfer by holding company to subsidiary cannot be branded as colourable device. In any case, this is applicable to the case of group companies and not to the assessee as the transferor under consideration is not by holding company to its subsidiary and consequently no benefit of S, 47(iv) of the Act has been claimed.
(vi) The change in the inter se status of the companies is again irrelevant for the purpose of deciding the issue under consideration the court approved amalgamation cannot be found fault with. For this 22 ITA No.4477/Mum/2017 and other two appeals M/s. Jayneer Capital Pvt. Ltd., purpose, reliance is placed upon the order of the Kolkata Bench of the Tribunal in the case of Electrocast Sales India Ltd. v. DCIT (92 taxmann.com 85).
(vii) It is not correct to say that the real purpose is to divide the business amongst family members. In any case, if the transactions are not in violation of any law or unreal the same cannot be disregarded. Further, when the ultimate recipient of gifted shares sells the shares, it would be subject to capital gain tax taking the cost of acquisition with reference to that of the previous owner as provided under section 49(l)(ii) of the Act, Accordingly, it is not even a case where the assesses has been able increase its cost of acquisition with a view to pay lower capital gains in future. We also observe that if the transaction is a colourable device, no cognizance of the same can be taken and consequently there is no question of charging any capital gain arising out of these transactions.
(viii) The Assessing Officer has described in detail the transactions of share transfer of group companies. As per out considered view this is not relevant for the purpose of deciding the issue. However, to put at rest any possible doubt the same is discussed herein below,
(a) Zee News Limited 23 ITA No.4477/Mum/2017 and other two appeals M/s. Jayneer Capital Pvt. Ltd., The allegation of the Assessing Officer is regarding transfer of shares from Churu Trading Co. P. Ltd., Ganjam Trading Co. Pvt, Ltd., etc. to 25FPS Media P. Ltd. In this regards, we observe that transfers have taken place in a legitimate ways and there is no illegalities involved. The Assessing Officer has merely complained that the ownership of M/s. Zee News Ltd has been shifted from one group of shareholder to another but how this is impermissible or resulted in evasion of lawful tax liability has not been pointed out. All transfers of shares are duly accounted and reported. For a transaction to be a colourable device, it has to be sham or impermissible transaction resulting into evasion of tax. None of these ingredients have been proved.
(b) Dish TV Here the complaint of Assessing Officer is regarding transfer of controlling interest from Veena Inestment, P. Ltd., Churu Trading Co. P. Ltd., Jayneer Capital P, Ltd. etc, to Direct Media Dist Ventures P. Ltd. etc. Here again, no illegality of tax evasion has been pointed out. All transfer of shares are duly accounted and reported.
(c) Wire & Wireless India Ltd., (City Cable) Similar objections have been raised by the A.O regarding transfer of shares from premier finance and Trading Co. Ltd., Jayneer Capital Pvt. 24 ITA No.4477/Mum/2017 and other two appeals
M/s. Jayneer Capital Pvt. Ltd., Ltd etc. to Direct Media Solution P. Ltd etc. we refer and rely upon the submissions made hereinabove.
(d) Zeel, Zee Learn, Essel Propack, Jayneer Capital Pvt. Ltd. etc .As in the case of companies referred to in the preceding paras, the allegation of the A.O is same in case of these companies. We refer and rely upon our observation made hereinabove.
27. In light of the above discussion, the transactions cannot be said to be colourable device and, therefore, the decisions relied upon by the A.O has no relevance. Further, by no stretch of imagination, the gain can be taxed under the head income from other sources. The provisions of S. 56(1) of the Act reads as under;
"56.(1) Income of every kind which is not to be excluded from the total income under this Act shall be chargeable to income tax under the heard income from other sources, if it is not chargeable to income tax under any of the heads specified in section 14, items A to E.
28. The income from other sources is the last and residual head of income. A source of income which does not specifically fall under any one of the other four heads of income (viz, Salaries, Income from House Property, Profit and gains of business or profession, or capital gain) is to be computed and brought to charge under section 56 under the head "income from other sources". In other words, it can be said that the residuary head of income can be resorted to only if none of the specific head is applicable to the income in question and that it comes into the 25 ITA No.4477/Mum/2017 and other two appeals M/s. Jayneer Capital Pvt. Ltd., operation only if the preceding heads are excluded. However, the benefit accrued to the assessee in present case is in the capital field and can be brought to tax only under the head capital gain. Accordingly, the provisions of Sec. 56(1) cannot be resorted to.
29. As regards transfer of shares as gift, we observe that there is nothing that prohibits a company from giving or receiving gifts. There is no requirement of a gift deed. Only requirement is that it should be authorized by its Memorandum of Association. In the present case, although there is no gift deed, the transfer without consideration as gift are authorized by the Memorandum of Association as is evident from clause 36 of Memorandum at Pg. 95 of PB-I.
30. The provision of section 5, section 122 and section 123 of the TOPA which read as under:
Section 5 of TOP A "5. In the following sections "transfer of property" means an act by which a living person conveys property, in present or in future, to one or more other living persons, or to himself and one or more other living persons; and "to transfer property" is to perform such act.
In this section "living person includes a company or association or body of individuals, whether incorporated or not, but nothing herein contained shall affect any law for the time being in force relating to transfer of property to or by companies, associations or bodies of individuals......" Section 122 of TOPA "122. "Gift" is the transfer of certain existing movable or immovable property made voluntarily and without consideration, by one person, called the donor, to another, called the donor, and accepted by or on behalf of the donee. 26 ITA No.4477/Mum/2017 and other two appeals
M/s. Jayneer Capital Pvt. Ltd., Such acceptance must be made during the lifetime of the donor and while he is still capable of giving.
If the donee dies before acceptance, the gift is void"] Section 123 of TOPA "123. For the purpose of making a gift of immovable property, the transfer must be effected by a registered instrument signed by or on behalf of the donor, and attested by at least two witnesses.
For the purpose of making a sift of movable property, the transfer may be effected either by a registered instrument signed as aforesaid or by delivery." A perusal of the provisions of sections 5, 122, 123 of TOPA indicate that there is no restriction on the corporate transfer of shares by way of gift. There is no requirement in TOP A that a 'gift' can be made only between natural persons out of natural love and affection which means that as long as a donor company is permitted by its memorandum/articles of association to make a 'gift, it can do so. Further, it is clear from section 123 of TOPA, there is no requirement of a gift deed. We observe that for movable property, a gift deed in writing is not necessary, an oral agreement with transfer of possession is sufficient to complete a gift of a movable property.
This view has been held by the Hon'ble Mumbai Tribunal in the case of Nerka Chemicals Pvt. Ltd. Vs. DCIT [ITA 4423/M/2014] which held as under:
"Further, the Coordinate bench of Tribunal in DCIT Vs KDA Enterprises (supra) held section 2(24) defines 'income'. The definition of 'income' provided in section 2(24) although an inclusive definition, but it specifically provides the income which are intended to be taxed under the provisions of the Act. Even the income 27 ITA No.4477/Mum/2017 and other two appeals M/s. Jayneer Capital Pvt. Ltd., in the nature of capital gains as per section 45, and gifts received as per section 56(2)(v), (vi), (vii) etc. are included in the definition of income. Thus under the Act only the receipts which are in the nature of 'income' are subjected to tax. Any other receipts which are not in the nature of 'income' are not liable to tax under the provisions of the Act. Section 5 provides for scope of total income chargeable to tax in India on the basis of receipt, accrual and deemed to be received and accrued in India. In view of above, the charging section of the Act specifically provides for taxation of 'income' of an assessee. For a receipt to be taxable under the provisions of the Act it must necessarily be in the nature of an income or its taxability should have been specifically provided by the statute. Under the Act, what is subjected to tax is only the 'income' of the assessee and not each and every receipt of the assessee, where the other receipts not in the nature of income are intended to tax, the legislature has specifically made provisions for taxability of such receipts in the statute itself like section 45, section 56(v), 56(vi), 56(vii) etc. It was also held that as per the provisions of law prevailing during the year under consideration, the gift received by one corporate body from another corporate bodies do not come under the ambit of income as contemplated under section 2(24) or any other provisions of the Act. While referring and following the decision in DP World (P) Ltd (supra) it was further held that companies are competent to make and receive sifts and natural love and affection are not necessary requirement. It was held that the only requirement for company is to make sifts as per respective Memorandum and Article of association, which authorize the company for the same. Applying the proposition of law laid down in the above decision to the facts of the instant case, it is found that the assessee and the donor companies are authorized in this regard for receiving and making sifts respectively by their Memorandum and Articles of association. "
[Underlined for emphasis] Even the Hon'ble Chennai Tribunal in the case Redington (India) Ltd. Vs JCIT [49 taxmann.com 146] has held that there is nothing against a company making gift of its property to another company. A transfer without consideration when claimed as a gift is always a gift. It is not possible to give any other color. There is nothing anywhere in law, which prescribes that only natural persons can make gift on the ground of 'love and affection'. Therefore, the lower authorities have erred in law in concluding that the assessee being a corporate body cannot make a gift. 28 ITA No.4477/Mum/2017 and other two appeals
M/s. Jayneer Capital Pvt. Ltd., In view of the above, transfer of shares of WWIL & DTIL without consideration as gift are valid, permissible and genuine.
31. From the record we found that in one of the DMAT slips (Pg 89 of PB-I), which related to transfer of 98,31,658/- shares without consideration, the CIT(A) held that this was not a gift since the assessee had not ticked the option of "gift" provided in the slip instead had mentioned it was a case of transfer of off market inter se transfer between promoters. In this regard we observed that the SEBI (Substantial Acquisition of Shares and Takeover) Regulation, 1997 [hereinafter referred to as "SEBI Takeover Code"] requires public announcement on transfer of prescribed limit of shares. However, an exemption is provided where the transfer of shares is an inter se transfer between promoters. In the instant case, it is an off market inter se transfer of shares between promoters rather than simply mentioning gift which would invite doubts as to why public announcement was not made. Hence, to be more specific and claim exemption from public announcement of transfer, "off market inter se transfer of shares between promoters" was mentioned. Further, it is not a case where the assessee has ticked another option. The assessee has disclosed that the shares are transferred without consideration which is evident from the fact that no consideration amount has been mentioned in the slip as required. Moreover the fact that the Assesses had not ticked the option 29 ITA No.4477/Mum/2017 and other two appeals M/s. Jayneer Capital Pvt. Ltd., of "gift" in the transfer slip cannot change the character of the transactions. Further, it certainly cannot be concluded that the transaction would tantamount to exchange merely because of non- ticking of the options in the transfer sleep. Hence, the observation of the CIT(A) are on wrong appreciation of facts.
32. As per our considered view the transfer of shares, by way of gift, are exempt from the provisions of capital gain by virtue of provisions of section 47(iii) of the Act which read as under:
Transactions not regarded as transfer.
47. Nothing contained in section 45 shall apply to the following transfers:--
(i) any distribution of capital assets on the total or partial partition of a Hindu undivided family;
(ii) [***]
(iii) any transfer of a capital asset under a sift or will or an irrevocable trust:
The Hon'ble Gujarat High Court in the case of the Prakriya Pharmacem Vs. ITO [238 Taxman 185] held that in case where an assessee gifted its shares to its sister concern, such transaction would fall within the ambit of section 47(iii) and therefore such a transaction is exempt from capital gain. Accordingly, the transfers made as gift without consideration are not taxable under the provisions of capital gains. 30 ITA No.4477/Mum/2017 and other two appeals
M/s. Jayneer Capital Pvt. Ltd.,
33. The Ground 1 and 2 of the Department's Appeal [ITA 4321/M/2017] are inter-related to the above facts, the same are dealt with as under:
Ground 1: By way of Ground 1 of the Department's Appeal the department contests that the assessee cannot take claim of transfer of shares as not taxable by virtue of the provisions of section 47(iv) of the Act.
34. The assessee has transferred shares of WWIL & DTIL to group companies not being its subsidiaries. The assessee has not taken cover of the provisions of section 47(iv) of the Act. As regards the shares of DTIL and WWIL transferred as gift, the said transfers are not taxable by virtue of section 47(iii) of the Act.
35. Ground 2: By way of Ground 2 of the Department's Appeal, the department contest that fair market value of shares transferred should be taxed under the provisions of section 56(1) of the Act. It is the stand of the Ld. Departmental Representative ("DR") and that of the AO that fair market value of shares of WWIL & DTIL should be added under section 56(1) of the Act. The same cannot be accepted. Attention is invited to the provisions of section 56(1) of the Act which read as under:
"Income from other sources
56. (1) Income of every kind which is not to be excluded from the total income under this Act shall be chargeable to income-tax under the head 31 ITA No.4477/Mum/2017 and other two appeals M/s. Jayneer Capital Pvt. Ltd., "Income from other sources", if it is not chargeable to income-tax under any of the heads specified in section 14, items A to E."
From the above, we observe that income from other sources is the last and residual head of income. A source of income which does not specifically fall under any one of the other four heads of income (viz, Salaries, Income from House Property, Profit and Gains of business or profession, or capital gain) is to be computed and brought to charge under section 56 under the head "Income from Other sources". In other words, it can be said that the residuary head of income can be resorted to only if none of the specific head is applicable to the income in question and that it comes into the operation only if the preceding heads are excluded Thus, it can be said that the residuary head of income can be invoked only if all the following conditions are satisfied. i. Income - There is an "income" [Section 2(24) read with section 4 and 5 of the Act] ii. Not covered by the other heads of income However, the benefit accrued to the Assessee in present case is in the capital field and can be brought to tax only under the head capital gain. Accordingly, the provisions of section 56(1) cannot be resorted to. 32 ITA No.4477/Mum/2017 and other two appeals
M/s. Jayneer Capital Pvt. Ltd., We may also refer to the provisions of section 56(2)(viia) of the Act which reads as under:
(viia) where a firm or a company not being a company in which the public are substantially interested, receives, in any previous year, from any person or persons, on or after the 1st day of June, 2010-[but before the 1st day of April, 2017], any property, being shares of a company not being a company in which the public are substantially interested,--
(i) without consideration, the aggregate fair market value of which exceeds fifty thousand rupees, the whole of the aggregate fair market value of such property;
(ii) for a consideration which is less than the aggregate fair market value of the property by an amount exceeding fifty thousand rupees, the aggregate fair market value of such property as exceeds such consideration:
Provided that this clause shall not apply to any such property received by way of a transaction not regarded as transfer under clause (via) or clause (vic) or clause (vicb) or clause (vid) or clause (vii) of section 47.
Explanation.--For the purposes of this clause, "fair market value" of a property, being shares of a company not being a company in which the public are substantially interested, shall have the meaning assigned to it in the Explanation to clause (vii);
From the above, we observe that the aforesaid provisions apply in a case where a company receives shares of private limited companies for without or inadequate consideration. In the present case, the assessee is the transferor and not the recipient and moreover the shares in question are those of listed companies. Accordingly, the provisions of section 56(2)(viia) cannot apply.
In view of the above, the CIT(A)'s observations that the provisions of section 56(1) do not apply in case of transfer of shares deserves to be upheld.
33ITA No.4477/Mum/2017 and other two appeals
M/s. Jayneer Capital Pvt. Ltd.,
36. With respect to above grounds, the ld. DR relied on Para 2.3 of the AO's order to contest that the assessee has not submitted various essential details during the course of the assessment proceedings.
37. In this regard, we observe that the assessee handed over a copy of letter dated 25.03.2015 by which it is clear that the assessee submitted all the requisite details.
38. The Ld. DR also relied upon Para 3.3 to 3.6 to contest that the assessee undertook a modus operandi to transfer share of listed companies worth crores to a wholly owned subsidiary which ultimately get merged into other group concerns by which it is alleged that the assessee avoids capital gain tax. For this the Ld. DR relied on Para 10 at Pg 8 of the AO's order to contest that the assessee at first gifted shares of WWIL & DTIL to its wholly owned subsidiaries Essel Champs as gift. Essel Champs thereafter merged with PFT. It was alleged that the assessee had succeeded in avoidance of payment of tax by transferring shares of WWIL and DTIL, ultimately to PFT under the said modus operandi.
39. In this regard we observe that the facts relied upon by the AO at Para 10 relate to AY 11-12 and not to the relevant assessment year under consideration i.e. 2012-13 as is evident from Para 10.2 and 10.3. The transfer of shares of WWIL and DTIL to Essel Champs in the earlier 34 ITA No.4477/Mum/2017 and other two appeals M/s. Jayneer Capital Pvt. Ltd., year has no bearing on the present dispute. The assessee has been assessed to tax for AY 11-12 and the aforesaid transactions have been accepted. Further, it is not clear as to how the assessee has avoided tax by adopting the above modus operandi since direct gift by assessee to PFT would also be exempt. Further, when the ultimate recipient. PFT sells the shares it would be subject to capital gain tax taking the cost of acquisition with reference to that of the previous owner as provided under section 49(1)(ii) of the Act. Accordingly, it is not even a case where the assessee has been able increase its cost of acquisition with a view to pay lower capital gains in future.
40. In this regard it is appropriate to bring on record that the ld. DR fails to appreciate that scheme of amalgamation would be approved by the High Court only after ensuring that the same is not prejudicial to the interest of its members or to public interest. Merger scheme approved by the High Court having in mind larger public interests cannot be disturbed by the revenue merely because the assessee has obtained tax benefits. For this purpose reliance may be placed on the decision of Kolkata Benches of the Tribunal in the case Electroplast Sales India Ltd. Vs. DCIT (170 ITD 507) (Kol.).
41. After going through the entire order of the Assessing Officer wherein the Assessing Officer alleged that the assessee has adopted a 35 ITA No.4477/Mum/2017 and other two appeals M/s. Jayneer Capital Pvt. Ltd., colourable device, however, not a single instance has been brought on record by the department of any tax evasion.
42. In view of the above discussion, we direct the Assessing Officer to consider shares of WWIL transferred to ECRPL No. 1,03,31,658 and to ECRPL No. 1,28,26,555 as a gift, therefore, not liable to tax. In respect of shares transferred to EBPL, the sale consideration is not to be replaced by the market price but at the price on which these have been transferred. Similarly in respect of shares of DTIL transferred to PFT 2100 shares and DMNDVPL 3050 shares the same to be treated as a gift not liable to tax. In sum and substance only transaction of transfer of shares of Dist TV No. 10,32,125/- to ECRPL are liable to tax under the head capital gains amounting to Rs. 2,80,23,486/-. We direct accordingly.
43. Assessee's ground No. 2 related to disallowance of interest of Rs. 57,25,64,708/- U/s 36(1)(iii) of the Act. We have considered the rival contentions and carefully gone through the orders of the authorities below and found from the record that the assessee has an opening balance of advances of Rs. 215.75 Cr and closing balance of Rs. 184.16 Cr which inter alia includes share application money to Essel Sports Pvt. Limited, its wholly owned subsidiary and share application money to Mumbai Football Club Pvt. Ltd., a group concern, details of which are as under:
36ITA No.4477/Mum/2017 and other two appeals
M/s. Jayneer Capital Pvt. Ltd., Particulars As on 31.03.2011 As on 31.03.2012 Pan India Infrastructure Pvt. Ltd. 202.60 Cr 169.62 Cr Mumbai Football Club Pvt. Ltd 12.79 Cr 14.32 Cr
44. The Assessing Officer has made disallowance by disregarding the fact that the advances were made as a commercial expediency. From the record we found that during the course of the assessment proceeding vide letter dated 25.03.2017, the assessee has substantiated that the advances in the form of share application money were out of commercial expediency and therefore there was no occasion to disallow any proportionate interest expenditure. Before the ld. CIT(A), the assessee has reiterated its contentions as submitted before the AO. The CIT(A) rejected the assessee's submission and upheld the disallowance of interest.
45. We have considered rival contentions and carefully gone through the orders of authorities below, we have also deliberated on the judicial pronouncements referred by the lower authorities in their respective orders and cited before us by the ld AR and the ld DR. We found that the assessee is registered NBFC and for the purpose of its business it invests strategically into various entities. The AO in his impugned order has failed to appreciate that the aforesaid advances in the nature of share application money were done with a view to gain from investments in different ventures. The aforesaid advances were made to acquire promoter/controlling interest and to facilitate the Assessee's 37 ITA No.4477/Mum/2017 and other two appeals M/s. Jayneer Capital Pvt. Ltd., business interest. It may be pertinent to note that strategic advances to acquire controlling/promoter interest in the form of share application money stands on a different footing than regular advances. In the case of a strategic advance to acquire controlling interest, the Assessee gains from appreciation of equity share value of the investee company. If interest is charged this would go to reduce the profits and reduce equity share value. If no interest is charged the same amount would be returned in the shape of profits/higher equity share value. This aspect has to be kept in view while determining the question whether advancement of a loan is a measure of business expediency. As regards, the share application money to M/s Essel Sports Ltd, the assessee's wholly owned subsidiary the advance was made in AY 09-10 onwards.PAN India had launched Indian Cricket League and needed funds to make it a successful event. PAN India was very hopeful that this venture will generate good returns. In this premise, the Assessee being into the business of finance and investment decided to support the venture by way of share capital infusion so as to not only finance the venture but also participate in the return it may generate. However, due to various reasons, the league failed to generate required returns. The said funds have been utilized only for business purpose w.e.f 01.04.2012, Pan India Infrastructure Pvt. Ltd. merged into Essel Sports (thereafter the name changed to Pan India Infrastructure Pvt. Ltd.) 38 ITA No.4477/Mum/2017 and other two appeals M/s. Jayneer Capital Pvt. Ltd., which entered into infrastructure business earning revenue receipts from construction activities. As regards, the share application money to M/s Mumbai Football Club P Ltd: The Assessee advanced a sum of Rs. 2.75 Cr, Rs. 7.93 Cr, Rs. 0.58 Cr, Rs. 1.53 Cr, in AY 08-09, AY 09- 10, AY 10- 11, AY 11-12 respectively. Mumbai Football Club is among 14 premier football clubs of India that participate in the professional I-League tournament under the aegis of the All India Federation. Mumbai FC is a venture of the Essel Group incorporated with the object to set up a football club, which includes development, training, coaching, marketing and managing football games / sports events. Further, it was to set-up infrastructure for sporting events on national and international levels which has potential advertisement and prize money revenue. To promote such activity, the Assessee invested in the aforesaid concern not only to finance the said activity but also participate in the returns it generates. Further, during the year under consideration, the Assessee advanced a further sum of Rs. 1.54 Cr. The said funds have been utilized only for business purpose. Thus, all the facts and circumstances clearly indicate that the advances were under commercial expediency. The Hon'ble Bombay High Court in the case of PCIT Vs. Sesa Resources [250 Taxman 182] has held that where assessee company borrowed funds and advanced same to its sister concern, since amount was neither a donation nor loan was given to an individual or to a director for his 39 ITA No.4477/Mum/2017 and other two appeals M/s. Jayneer Capital Pvt. Ltd., personal use, same would be presumed to be advanced for commercial expediency, thus no disallowance could be made U/s 36(l)(iii) of the Act.
46. Even though, the Tribunal in assessee's own case for the A.Y. 2008-09 and 2009-10 had set aside the issue for fresh adjudication, however, during the year under consideration, all the facts are on record. Considering all the facts and circumstances of the case during the A.Y. 2012-13 under consideration as discussed above, we hold that the investment was made as a commercial expediency. Accordingly, we direct the Assessing Officer to delete the disallowance of interest.
47. The Assessing Officer has also disallowed the assessee's appeal ground 3 related to disallowance of interest of Rs. 18,64,68,899/- under section 14A read with Rule 8D and Non adjudication of additional claim for deletion of suo-moto disallowance under section 14A read with Rule 8D of Rs. 8,29,19,798/-
48. Rival contentions have been heard and record perused. From the record we found that the assessee had not earned any exempt income during the year under consideration but still made "a suo-moto disallowance of Rs.8,29,19,798/- d/s 14A read with Rule 8D of the Income-tax Rules, 1962 [hereinafter referred to as "the Rules"]. The Assessee suo-moto disallowed Rs. 8,16,63,713 towards interest and Rs. 40 ITA No.4477/Mum/2017 and other two appeals
M/s. Jayneer Capital Pvt. Ltd., 12,56,085 towards expenses. However, the AO re-computed the same and worked out the disallowance as under:
Disallowance under Section 14A rw Rule 8D(i) - Direct Expenditure 14,70,689 Disallowance under Section 14A rw Rule 8D(ii) - 26,81,32,612 Disallowance of proportionate interest expenditure Disallowance under Section 14A rw Rule 8D(iii) - 1,52,13,100 Disallowance of administrative expenditure computed at 0.5% of average investment Total amount disallowed under Section 14A rw 28,48,16,401 Rule 8D In this premise, the AO made a further disallowance of Rs. 20,18,96,603/- (28,48,16,401 - 8,29,19,798). Before the CIT(A), the assessee contended, inter alia, that the disallowance under section 14A read with Rule 8D of Rs 20,18,96,603/- should be deleted since in the absence of exempt income, the provisions of section 14A read with Rule 8D do not apply. It additionally claimed that the suo-moto disallowance of Rs. 8,29,19,798/- should be deleted on the same footing. The CIT(A) in principle upheld that disallowance of interest of Rs. (26,81,32,612 - 8,16,63,713) but however held that since the entire interest stands deleted under section 36(l)(iii) or suo-moto disallowed by the assessee in return of income, no disallowance under 14 A read with Rule 8D was called for. As regards disallowance of expenses under section 14A read with Rule 8D, the CIT(A) held that since the assessee had claimed only a sum of Rs. 91,000/- in its return of income against which the assessee had suo-moto disallowed a sum Rs. 12,56,085/-, no further disallowance was warranted.41
ITA No.4477/Mum/2017 and other two appeals
M/s. Jayneer Capital Pvt. Ltd., The assessee's appeal is against the confirmation of disallowance of interest in principle and non-adjudication of the assessee's contention to delete the suo-moto disallowance under section 14A read with Rule 8D. The department is in appeal vide Ground 3 and 4 of their appeal contending that the disallowance under section 14A read with Rule 8D must stand irrespective of the fact that a) entire interest has been disallowed under section 36(l)(iii) of the Act b) no expenses have been claimed by the assessee in its return of income. In our considered opinion, the entire disallowance u/s 14A of the Act amounting to Rs. 28,48,16,401/- (including the suo-moto disallowance of Rs. 8,29,19,798) should be deleted since the Assessee has earned no dividend income during the year under consideration.
49. For this purpose, reliance may be placed on the decision of the Hon'ble Delhi High Court in the case of Cheminvest Ltd Vs CIT (378 ITR
33) overruling the Tribunal's decision relied upon by the AO holding as under:
"In the context of the facts enumerated hereinbefore the Court answers the question framed by holding that the expression 'does not form part of the total income' in Section 14A of the envisages that there should be an actual receipt of income, which was not includible in the total income, during the relevant previous year for the purpose of disallowing any expenditure incurred in relation to the said income. In other words, Section 14A would not apply if no exempt income was received or receivable during the relevant previous year."42
ITA No.4477/Mum/2017 and other two appeals
M/s. Jayneer Capital Pvt. Ltd., The Hon'ble Bombay High Court in the case of PCIT Vs. Rivian International P. Ltd. [ITXA 693 of 2015] has also held that if the assessee during the relevant year has not earned any tax-free income, the corresponding expenditure incurred cannot be taken into consideration for disallowance.
50. In view of the above discussions we direct the Assessing Officer to delete the disallowance of Rs. 28,48,16,401/-. The Department's appeal in Ground 3 and 4 against the findings of the CIT(A) will also stand dismissed on the same footing.
51. Assessee's appeal Ground 4 related to disallowance of share premium of Rs.34,99,65,000/- as unexplained cash credit u/s 68 of the Act.
52. Rival contentions have been heard and record perused. During the financial year ended 31.03.2012 relevant to the assessment year 2012- 13 under consideration, the assessee had issued 350 Optionally Convertible Preference shares (face value Rs 100 per share) to M/s PAN India Infraprojects Pvt. Ltd [hereinafter referred to as "PIIPL"] at a premium of Rs.9,99,900/- per share. The AO treated the share premium of Rs.34,99,65,000/- as unexplained cash credit u/s 68 of the Act. The AO alleged that the Assessee had failed to substantiate the amount 43 ITA No.4477/Mum/2017 and other two appeals M/s. Jayneer Capital Pvt. Ltd., received with documentary evidence. The CIT(A) upheld the contentions of the AO.
53. We have considered rival contentions and find from record that during the year under consideration, the assessee has issued 350 Optionally Convertible Preference shares to PIIPL. By filing various documentary evidences, the assessee has duly explained the nature and source of receipt of money of Rs. 35,000 towards share capital and balance Rs. 34,99,65,000 towards share premium aggregating to Rs. 35,00,00,000/- received towards issue of OCPs by establishing the identity and creditworthiness of the subscriber PIIPL as well as the genuineness of the transaction. Consdiering the documents placed on record, the addition of Rs. 34,99,65,000/- under section 68 of the Act is unsustainable both in facts and law.
54. As per our considered opinion, the addition U/s 68 of the Act can be made only where the assessee is unable to establish the identity, genuineness and creditworthiness of the loan creditor/subscriber. In the instant case, we found that the share subscriber PIIPL is a regular assessee under the Act, regularly filling return of income. The return of income along with audited balance sheet of the share subscriber was filed before the lower authorities.
The summary of the credit worthiness of the PIIPL can be drawn as under:
44ITA No.4477/Mum/2017 and other two appeals
M/s. Jayneer Capital Pvt. Ltd., Particulars Amt in Rs.
Shareholder's Funds 55,63,45,266 Borrowed Funds & Other Liabilities 1039,36,10,991 TOTAL A VAIL ABE FUNDS 1094,99,56,257 Amount given to the Applicant Company 35,00,00,000/-
It is well established that in cases prior to AY 2013-14, the assessee is not required to prove source of source of funds received since the proviso to Section 68 of the Act requiring to do so was introduced w.e.f 01.04.2013. For this purpose, reliance can be placed on the decision of the Hon'ble Bombay High Court in the case of CIT Vs. Gagandeep Infrastructure Pvt. Ltd. [ITXA 1613 of 2014] and PCIT Vs. Veedhata Tower Pvt. Ltd. [ITXA 819 of 2015].
With regard to allegation of genuineness of the transaction, we observed that since all the funds have been remitted through a proper banking channel duly recorded in the books of account and financials of the Company, there cannot be any doubt on the genuineness of the transaction. A copy of the bank statement of the Assessee was submitted to establish the same. The Assessee even submitted the relevant board resolution, register of members and Form 2 filed with the ROC intimating allotment of preference shares. In fact, the monies received towards share capital has been accepted by the AO and it is only the money received toward share premium which is in dispute. 45 ITA No.4477/Mum/2017 and other two appeals
M/s. Jayneer Capital Pvt. Ltd.,
55. In view of the above, the nature and source of Rs. 35 crores received stands explained and no addition under section 68 of the Act is called for.
56. Furthermore, in terms of the decision of the Hon'ble Bombay High Court in the case of Vodafone India Service (P) Ltd. 368 ITR 1 the receipt of share premium is a capital receipt, therefore, not taxable under the IT Act held as under:
"42. It was contended by the Revenue that in any event the charge would be found in Section 56(1) of the Act. Section 56 of the Act does provide that income of every kind which is not excluded from the total income is chargeable under the head income from other sources. However, before Section 56 of the Act can be applied, there must be income which arises. As pointed out above, the issue of shares at a premium is on Capital Account and gives rise to no income."
Section 56(2)(viib) of the Act which seeks to tax amount received in excess of fair market value of shares only applies from Assessment Year 2013-14. Hence, Section 56(2)(viib) of the Act cannot be resorted to in the instant assessment year 2012-13 under consideration. Therefore, share premium is not chargeable to tax. Even if the share premium is excessive, the same cannot be taxed under the provisions of section 68 during the A.Y. 2012-13 under consideration, since the nature and source of the same stands fully explained. This contention is duly supported by the decision of the Mumbai Tribunal in the case of DCIT Vs. Varsity Education Management Pvt. Ltd. [ITA 6991/Mum/2016]. Accordingly, we direct the Assessing Officer to delete the addition made 46 ITA No.4477/Mum/2017 and other two appeals M/s. Jayneer Capital Pvt. Ltd., on account of share premium received by the assessee amounting to Rs. 34,99,65,000/-.
57. ITA No.2035/Mum/2017
58. In this appeal, Revenue is aggrieved for deleting disallowance made by AO u/s.14A r.w.Rule 8D.
59. Rival contentions have been heard and record perused. From the record we found that the assessee filed its return of income on 30.09.2013. declaring total income at loss of Rs. 17,59,098/- making no suo-moto disallowance under the provisions of section 14A read with Rule 8D. Assessment under section 143(3) of the Income Tax Act, 1961 was framed vide order dated 06.01.2016, making disallowance of Rs. 1,62,25,661/- under section 14A of the Act mechanically applying Rule 8D.
60. By the impugned order, CIT(A) deleted the disallowance after observing as under:-
It is found that the AO has not specifically noted any expenditure that has to be incurred for the purpose of investment. The AO has worked out the disallowance u/s 14A mechanically. The Assessee has suomoto disallowed the major portion of the expenditure u/s 36(l)(iii) & u/s 37 of the Act. Further, it is found out that, during the year, the assessee has not earned any dividend income during the year. Therefore, in the view of Hon'ble High Court of Punjab & Haryana decision in the case of Lakhani Marketing Inc. (49 taxmann.com 257) and Hon'ble High Court of Allahabad decision in the case of M/s Shivam Motors (P) Ltd (55 taxmann.com262. Wherein it is held that unless and until, there is receipt of exempt income for concern assessment years, section 14A cannot be invoked.47
ITA No.4477/Mum/2017 and other two appeals
M/s. Jayneer Capital Pvt. Ltd.,
61. Against above order of CIT(A), revenue is in further appeal before us.
62. We have considered rival contentions and found that issue with regard to disallowance u/s.14A r.w. Rule 8D, when there is no exempt income is well settled. Hon'ble Delhi High Court in the case of Cheminvest Ltd Vs CIT (378 ITR 33) overruling the Tribunal's decision relied upon by the AO holding as under:
"In the context of the facts enumerated hereinbefore the Court answers the question framed by holding that the expression 'does not form part of the total income' in Section 14A of the Act envisages that there should be an actual receipt of income, which was not includible in the total income, during the relevant previous year for the purpose of disallowing any expenditure incurred in relation to the said income. In other words, Section 14A would not apply if no exempt income was received or receivable during the relevant previous year."
63. The Hon'ble Bombay High Court in the case of PCIT Vs. Rivian International P. Ltd. [ITXA 693 of 2015 has also held that if the assessee during the relevant year has not earned any tax-free income, the corresponding expenditure incurred cannot be taken into consideration for disallowance.
64. Respectfully following the above decisions, we do not find any infirmity in the order of CIT(A) in so far as assessee was not having any exempt income during the year under consideration. 48 ITA No.4477/Mum/2017 and other two appeals
M/s. Jayneer Capital Pvt. Ltd.,
65. In the result, appeal of the assessee is allowed in part whereas the appeal of the revenue is dismissed.
Order pronounced in the open court on 28.02.2019.
Sd/- Sd/-
(R.C. SHARMA) (AMARJIT SINGH)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Mumbai; Dated 28/02/2019
Karuna Sr.PS
Copy of the Order forwarded to :
1. The Assessee
2. The Respondent.
3. The CIT(A), Mumbai.
4. CIT
5. DR, ITAT, Mumbai
6. Guard file. BY ORDER,
सत्यापित प्रपत //True Copy//
(Asstt. Registrar)
ITAT, Mumbai