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5 ITA 6531/Mum/2017 insurance business cannot be brought to tax in India in terms of Article 7 of India Switzerland DTAA. Accordingly, addition is deleted. These grounds are allowed.

9. In grounds 4 and 5, assessee has challenged the disallowance of long-term capital loss arising from sale of shares.

10. Briefly the facts emerging from record are, the assessee was holding 12,34,476 shares constituting about 26% of the total shares of an Indian company, viz. TTK Healthcare Services Pvt Ltd (TTK, in short). These shares were acquired by the assessee in tranches under the Foreign Direct Investment (FDI, in short) route during the period from 08-03-2007 to 05-08-2010. All the shares having face value of Rs.10/- were acquired by the assessee with premium varying between Rs.35 to Rs.5,141.05. During the year under consideration, the assessee sold all its shares to Vidal Healthcare Services Pvt Ltd at mutually agreed terms of Rs.5 per share. In the process, assessee incurred long term capital loss of Rs.49,92,40,510/- and carry forward of such loss was claimed in the return of income filed for the impugned assessment year. After examining the facts relating to acquisition of sale of shares of TTK by the assessee, the assessing officer called for various details and asked the assessee to explain the justification of selling the shares at loss when they were purchased with very high premium. The assessing officer also called upon the assessee to furnish the valuation of the shares at the time of acquisition as well as at the time of sale under discounted cash flow (DCF) method as well as under rule 11UA. In response to the query raised, the assessee furnished all the details and also explained the reasons for disposing of the shares at a lesser value. Further, the assessee also furnished valuation report of the shares both, under net asset value and capitalization of earning method, as per which the value of shares were arrived at Rs.14.36 per share and Rs.13.82 per 6 ITA 6531/Mum/2017 share respectively. Additionally, the assessee also furnished a valuation report under DCF method valuing the share at (-) Rs.363/-. After examining the factual details, the assessing officer noticed that despite the fact that TTK was incurring cash loss in financial years 2008-09 and 2009-10, the assessee went ahead in buying shares with heavy premium. Further, he observed, when the assessee was called upon to value the shares of TTK as per rule 11UA, the assessee submitted that Rule 11UA prescribes the methodology for determining the fair market value of unquoted shares of a company for the purpose of section 56(2)(viia) and (viib) of the Act. Further, the assessee submitted, both section 56((2)(viia) and rule 11UA are attracted to the recipient of shares where there is an inadequate consideration paid by such recipient on purchase of shares. Therefore, it was submitted, since the assessee has sold the shares, section 56(2)(viia) and rule 11UA would not be applicable. The assessing officer, however, was not convinced with the aforesaid submissions of the assessee. He observed, there is no justifiable reason for the assessee in investing in shares of TTK with very high premium and thereafter selling them at huge loss. Thereafter, referring to and analyzing various other factual aspects, the assessing officer ultimately concluded that the long term capital loss claimed by the assessee on sale of shares is an artificial loss; hence, cannot be allowed. Accordingly, he disallowed the long term capital loss claimed by the assessee and consequently, denied the carry forward of the said loss to subsequent assessment year. Assessee challenged the aforesaid decision of assessing officer before learned DRP. After considering the submissions of the assessee in the context of facts and materials on record, learned DRP ultimately concurred with the decision of the assessing officer that the loss claimed by the assessee is an artificial loss. In terms of the aforesaid 7 ITA 6531/Mum/2017 directions of learned DRP, the assessing officer passed the impugned assessment order disallowing assessee's claim of long term capital loss.

10. The learned Senior Counsel for the assessee submitted, since the assessee has acquired the shares of TTK through FDI route, it has to follow the rules and regulations framed by Insurance Regulatory & Development Authority of India (IRDA) and Reserve Bank of India (RBI). He submitted, as per such regulation, there is an upper limit for investing in shares of an Indian company, which cannot exceed 26% of the whole shares. He submitted, the investment in shares through FDI route was approved by all the Regulatory Authorities including RBI. Copies of such approvals were furnished both before the assessing officer and learned DRP. He submitted, investment in shares of TTK was also approved in a board resolution. He submitted, as per FEMA regulations, no shares can be sold to a non resident at a lesser value. In this context, he drew our attention to the board resolution as well as the approval of the competent authority while purchasing shares of TTK. Drawing our attention to the audited financial statements of TTK, learned Senior Counsel submitted, TTK was incurring huge loss consistently over the years. However, to infuse capital in TTK for overcoming the loss, the assessee has to make investment by subscribing to shares at a premium. He submitted, it is a prudent commercial decision of the assessee to revive a loss making company, wherein, the assessee had stake. Drawing our attention to page 248 of the paper book, the he submitted, on 01-11-2011, IRDA had raised a query by asking TTK to justify the payment of unduly high premium by the assessee for buying the shares, whereas, during the same period shares were issued at par to the Indian promoter. He submitted, in response to the query raised by the IRDA, TTK had furnished its reply justifying subscription of shares at high premium by the 8 ITA 6531/Mum/2017 assessee. The learned counsel submitted, assessee had to subscribe to shares of TTK to keep the company going.

15. We have considered rival submissions and perused materials on record. We have also applied our mind to the decision cited before us. Undisputedly, the assessee, through FDI route had purchased, in tranches, shares of TTK at a substantially high premium. It is also a fact that assessee had sold the shares so acquired in the impugned assessment year at a below par value of Rs.5/- per share to an Indian entity. In the process, assessee has incurred long term capital loss. The assessing officer, alleging that the loss so claimed by the assessee has been artificially created, has disallowed the same. The reasoning of the assessing officer for doing so, broadly, is as under:-

16. It is a fact that assessee had challenged the disallowance of long term capital loss before learned DRP and in course of proceedings before learned DRP, the assessee had contested each of the aforesaid reasoning of the assessing officer with counter arguments supported by evidence. However, learned DRP has endorsed the decision of the assessing officer, more or less, accepting the reasoning of the assessing officer. Now, the sole issue before us is, whether the long term capital loss claimed by the assessee is allowable or not. Before we proceed to decide the core issue, it is necessary to observe, by share purchase agreement dated 08-12-2006, the assessee had initially purchased shares of TTK numbering 11,11,236 equity share of Rs.10/- face value at Rs.45. Subsequently, the assessee had purchased shares on 29-09-2009, 05-03-2010 and 05-08-2010 at a substantially high premium. The total shareholding of the assessee in TTK was to the extent of 26%. The balance 74% share in TTK was held by TTK group. On a perusal of documentary evidences placed on record, it is absolutely clear that the shares of TTK purchased on different dates between 08-03-2007 and 05-08-2010 with a premium was approved by the regulatory authorities, such as, IRDA and RBI. It is also a fact that as per FEMA regulations, the assessee cannot hold more than 26% of the total shareholding under the FDI route. There is no allegation that the aforesaid condition has been violated by the assessee.