Income Tax Appellate Tribunal - Chennai
Dcit, Chennai vs Arun Excello Homes Pvt Ltd., Chennai on 6 December, 2017
आयकर अपील य अ
धकरण, 'बी' यायपीठ, चे नई
IN THE INCOME TAX APPELLATE TRIBUNAL
' B' BENCH : CHENNAI
ी अ ाहम पी. जॉज , लेखासद य एवं ी जॉज माथन, या यक सद य के सम
BEFORE SHRI ABRAHAM P.GEORGE, ACCOUNTANT MEMBER AND
SHRI GEORGE MATHAN, JUDICIAL MEMBER
आयकर अपील सं./I.T.A. No.937/Mds/2017
नधा रण वष /Assessment year : 2013-2014
The Deputy Commissioner of Vs M/s. Arun Excello Homes Pvt. Limited,
Income Tax, 18, Bhattad Towers, West Cott Road,
Corporate Circle 1(1) Royapettah,
Chennai 600 034. Chennai 600 014.
[PAN AAGCA 6559H]
(अपीलाथ /Appellant) ( यथ /Respondent)
अपीलाथ! क" ओर से/ Appellant by : Dr. S. Ganesan, IRS, JCIT.
$%यथ! क" ओर से /Respondent by : Shri. B. Ramakrishnan, C.A.
सन
ु वाई क" तार)ख/Date of Hearing : 06-12-2017
घोषणा क" तार)ख /Date of Pronouncement : 06-12-2017
आदे श / O R D E R
PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER:
In this appeal filed by the Revenue, it is aggrieved that the ld. Commissioner of Income Tax (Appeals)-1, Chennai though his order dated 10.02.2017 deleted a penalty levied by the ld. Assessing Officer :- 2 -: ITA No.937/Mds/2017.
u/s.271(1) ( c) of the Income Tax Act, 1961 (herein after referred to as 'the Act').
2. Facts apropos are that assessee engaged in the business of construction of townships and housing projects had filed its return of income for the impugned assessment year disclosing income of A15,18,27,030/-. Assessee had entered into joint development agreement with four entities named ArunExcello Projects Private Limited, ArunExcello City Developers Pvt. Ltd, ArunExcello Enterprises Pvt. Ltd and ArunExcello Infro Projects Pvt Ltd, who were all associates of the assessee company (referred as Land Owning Affiliates or LOA) for development of land held by them. One M/s. Madison India Real Estate Fund Limited (in short MIREFL) incorporated in the Republic of Mauritius had invested a sum of A50 Crores, in the capital of the assessee company, and they were allotted 38000 shares of equity shares and 49,955 compulsory convertible debentures (CCDs). The allotment of equity shares and CCDs were done during the period from 07.01.2008 to 19.10.2010. It seems during the financial year 2011-12, M/s. MIREFL desired to exit from the assessee company by divesting their shareholding. The Land Owning Affiliates for whom assessee was doing the project agreed to purchase 37990 equity shares and 28614 CCDs held by M/s. MIREFL in the assessee company for a sum :- 3 -: ITA No.937/Mds/2017.
of A70 Crores. Prior to the date of actual transfer, the CCDs stood converted into equity shares. In other words what were actually acquired by LOA was 66604 equity shares held by M/s. MIREFL in company. Each of the LOA acquired 16652 equity shares, except for Arun Excello Enterprises Pvt Ltd which acquired 16648 equity shares.
3. Thereafter assessee did a reorganization of its share capital by converting the equity shares held by LOAs to optionally convertible debentures (in short 'OCDs'), with the approval from the Jurisdictional High Court. Scheme of reorganization of capital, came into effect on 25.10.2011 and equity shares held by four LOAs were converted into 1750 OCDs each. Aggregate value of 7000 OCDs in the books of the assessee was shown as A70 Crores. The value of OCDs exceeded the sum of A50 Crores originally received by the assessee from M/s. MIREFL against equity and CCDs, by a sum of A20 Crores. This amount was recorded by the assessee as discount on issue of OCDs, and amortized over the period of OCDs. Since the period of OCDs were ten years, the pro-rata discount charged in the books of assessee during the relevant previous year came to A2,00,28,351/-.
4. Ld. Assessing Officer was of the opinion that the entire scheme, when seen in totality brought out an unlawful method of :- 4 -: ITA No.937/Mds/2017.
avoidance of tax. According to him, corporate veil of the assessee company had to be lifted. Ld. Assessing Officer noted that there were three stages in the coloured transactions entered by the assessee with its associated and these were listed by him as under:-
(i) Conversion of CCDs held by M/s. MIREFL into equity
(ii) Purchase of equity held by M/s. MIREFL by associate concerns.
(iii) Conversion of the equity into OCDs.
As per the ld. Assessing Officer, Debenture Subscription Agreement dated 21.12.2007 entered by the assessee with M/s. MIREFL had clearly stated that CCDs did not carry any interest. According to the ld. Assessing Officer, this clause was placed in the agreement only to take advantage of Article 11 of the DTAA between India and Mauritius, since interest, if paid to M/s. MIREFL would have been taxable in India. As per the ld. Assessing Officer, this methodology was adopted only to avoid tax, since assessee's associates planned to book capital gains at a later stage in lieu of interest, because capital gains was not taxable under Article 13 of the DTAA. In other words, as per the ld. Assessing Officer interest payable on CCDs was clothed as capital gains for taking advantage of Article 13 of the DTAA. Thus, he held that the discount accounted by the assessee on OCDs was nothing but interest payable by the assessee to MIREFL for the :- 5 -: ITA No.937/Mds/2017.
investment made by them through the CCDs. Since assessee had not deducted tax on such amount, ld. Assessing Officer was of the opinion that assessee did not comply with Sec. 195 of the Act. Disallowance of A2,00,28,351/- was made u/s.40(a)(i) of the Act.
5. Aggrieved, assessee moved in appeal before the ld. Commissioner of Income Tax (Appeals). Argument of the assessee was that there was no provision in the Act which made discount on shares taxable in the hands of the investor. As per the assessee, amortization of discount on issue of OCDs could not be subjected to any deduction of tax at source.
6. Ld. Commissioner of Income Tax (Appeals) after considering the submissions of the assessee held as under at paras 22 and 23 of his order:-
''22. The transaction in substance however was that the appellant had received an investment of Rs.50 crores from an entity Madison based in Mauritius sometime in 2007. This investment was in the form of shareholding in the appellant itself. I Subsequently this investment was sold to the land owning affiliates for RS.70 crores resulting in capital gains of RS.20 crores (Rs.70 crores - RS.50 crores) in the hands f Madison which attracted tax in view of the extant laws in Mauritius. A certificate u/s 197 in NO.134/197/2011-12 dated 23.8.2011 was issued to the applicant i.e., Madison in this regard that the resulting capital gains was not exigible to tax in India. Subsequently in October, 20'11 the land-owning affiliates in order to expand their business has applied for restructuring of its :- 6 -: ITA No.937/Mds/2017.
shareholding to 7000 OCDs at ₹1,OO,OOO each (face value being Fts.10/- per OCD). This has resulted in a reduction of share capital and discount on issue of OCDs of Rs. 69,93,33,960. This amount of discount was written off against the existing balance of securities premium of ₹49,90,50,450/- in accordance with s.78 of Companies Act, 1956 as was applicable then. .The balance amount of Rs.20,02,83,351 was written off to P&L a/c over the life of OCDs estimated at 10 years by the appellant. The amount of discount is written off commencing from the date of issue of OCDs being October 201'1 to March 2Q1:2 (5 months pro rata) in AY. 2012-13 amounting to Rs.87,24,679. The balance amount is written off from AY. 2013-14 at Rs.2,00,28,351 for the subsequent years but for the last year when again the discount would be written off in a prorata manner as in AY. 2012-13. The issue which arises for consideration therefore is the nature of this balance discount amounting to Rs.20,02,83,510 which the AO has taken to be in the nature of interest.
23. As stated earlier, the explanations filed by the appellant make it evident that the view taken by the AO, that in substance what was returned to the investor was the interest against which TDS should have been deducted by the appellant company, is bereft of merit. It is so on account of the fact that when shares are converted to OCDs there is no component of interest in it.
Conversely, when debentures are converted into shares, interest would accrue on the resting period i.e., from tile date of debenture till its conversion to shares. Further, such interest would be deemed as paid to the shareholder which in turn is reinvested by the shareholder in shares. Therefore, the situation being where shares are converted to O'COs no interest would arise. Moreover, this is a book entry not resulting in any real; income. In view of the same, in my considered opinion therefore the AO has fallen in error in bringing to tax as interest the amount representing discount on OCDs. The impugned sum not representing interest would therefore not attract the provisions of tax deduction at source, the failure to comply with which would result in disallowance' u/s 40(a)(i). The Assessing Officer is therefore directed to delete the addition. This ground of appeal is allowed''.
:- 7 -: ITA No.937/Mds/2017.
7. Now before us, ld. Departmental Representative strongly assailing the order of the ld. Commissioner of Income Tax (Appeals) submitted that entire transactions were given a legal clothing through a series of steps, with the only intention of tax evasion. According to him, there was no prudent reason why OCDs worth A 70 Crores had to be issued against original investment of A50 Crores. According to him, the excess amount of A20 Crores received by the Mauritius Company was nothing but interest payable on the investments made by them in the assessee company. As per the ld. Departmental Representative, this was a fit case for lifting of corporate veil and finding the true nature of the transactions. Contention of the ld. Departmental Representative was that true intention of the transactions was only to evade tax. According to him, ld. Commissioner of Income Tax (Appeals) fell in error in not understanding the series of steps taken by the assessee which was with the sole intention of evading tax. As per the ld. Departmental Representative, the transactions had no commercial element at all. According to him, ld. Commissioner of Income Tax (Appeals) fell in error in deleting the disallowance made by the ld. Assessing Officer u/s.40(a)(i) of the Act.
:- 8 -: ITA No.937/Mds/2017.
8. Per contra, ld. Authorised Representative strongly supporting the order of the ld. Commissioner of Income Tax (Appeals) submitted that MIREFL had vide an application dated 05.08.2011, addressed to the Income Tax Officer, International Taxation-II (2) requested for issuing a certificate u/s.197 of the Act, for exempting them from withholding tax on transfer of the shares held by them in the assessee company. As per the ld. Authorised Representative, the said officer vide certificate No.134/197/2011-12, dated 23.08.2011, had authorized the purchaser who were the associate concerns of the assessee to remit the sale proceeds to the Mauritius company without deduction of tax. According to him, discount on shares and discount on OCDs were not at all comparable to interest. In any case, as per the ld. Authorised Representative there was no payment from the assessee to Mauritius company warranting any deduction of tax at source.
9. We have considered the rival contentions and perused the orders of the authorities below. What we find is that the investments made by the Mauritius company, named MIREFL was in the nature of equity shares and CCDs in the assessee company. The CCDs were later converted into equity shares. Equity shares held by the Mauritius company were transferred to four other companies. These four :- 9 -: ITA No.937/Mds/2017.
companies were associates of the assessee, and holding the land on which assessee was executing a project. The equity shares held by these four companies were later converted to OCDs under a scheme sanctioned by Hon'ble Jurisdictional High Court. In our opinion, lifting of corporate veil can be done only when it can be shown that the artificial juridical personality is being used with an ulterior motive. None of the steps through which investments made by MIREFL were sold to affiliated companies of the assessee and later converted to OCDs, can in our opinion be termed as done with any ulterior motive. The result of the transaction might have been that OCDs with value of A70 Crores were allotted against total original investments of A50 Crores of the Mauritius company. However, the difference in no case can be termed as interest paid by the assessee to the Mauritius company. Sec.194LC of the Act which deals with a case where interest is paid to a Non Resident and Sec 195 of the Act which deals with a case where payment of any nature is made to a Non Resident cannot in our opinion be roped in to say that assessee ought have deducted any tax at source. This is for simple reason that assessee had not paid any interest to MIREFL nor was it responsible for paying any interest to them. In such a situation, we are of the opinion that the ld. Commissioner of Income Tax (Appeals) had rightly held assessee as not liable for deduction of tax at source on the discount debited by :- 10 -: ITA No.937/Mds/2017.
it in its Profit and Loss account on the OCDs. Disallowance u/s.40(a)
(i) of the Act was rightly deleted by the ld. Commissioner of Income Tax (Appeals). We do not find any reason to interfere with the order of the ld. Commissioner of Income Tax (Appeals).
10. In the result, the appeal of the Revenue stands dismissed. Order pronounced in the open court at the time of hearing on Wednesday, the 6th day of December, 2017, at Chennai.
Sd/- Sd/-
(जॉज माथन) (अ ाहम पी. जॉज$)
(GEORGE MATHAN) (ABRAHAM P. GEORGE)
या यक सद य/JUDICIAL MEMBER लेखा सद'य/ACCOUNTANT MEMBER
चे नई/Chennai
.दनांक/Dated: 6th December, 2017.
KV
आदे श क" $ त0ल1प अ2े1षत/Copy to:
1. अपीलाथ!/Appellant 3. आयकर आयु3त (अपील)/CIT(A) 5. 1वभागीय $ त न8ध/DR
2. $%यथ!/Respondent 4. आयकर आय3
ु त/CIT 6. गाड फाईल/GF