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Income Tax Appellate Tribunal, MUMBAI BENCH “I ”, MUMBAI
आदेश/ ORDER
PER VIKAS AWASTHY, JM:
This appeal by the assessee is directed against the assessment order dated 26/04/2019, passed u/s.143(3) r.w.s. 144C(13) of the Income Tax Act, 1961 [ in short ‘the Act’] for the assessment year 2015-16.
Shri Farrokh V. Irani appearing on behalf of the assessee submits at the outset that the only ground for which he would be making submissions is ground No.D 3.e. To shorn ambiguity the relevant ground pressed by ld.Counsel for the assessee is reproduced herein under:
3. The DRP grossly erred in : a. xxxxxx b. xxxxxx c. xxxxxx d. xxxxxx e. “Holding that the alleged return was liable to tax in India under the India Mauritius Tax Treaty without specifying the Article of the Tax Treaty under which such amount could be taxable, and inter allia, without considering the fact that the Appellant’s investment in shares could not by any stretch be construed to be a debt claim.
The ld.Counsel for the assessee narrating facts of the case submits that the assessee was incorporated in Mauritius and is a tax resident of Mauritius. Its main object is to do investment activities. During the Financial Year 2008-09 to Financial Year 2014-15, the assessee made investments in Urbanedge Hotels & Holdings Pvt. Ltd. ( in short ‘ Urbanedge’) an Indian Company. The assessee subscribed to 10122914 equity shares for Rs.93,68,67,936/- during the aforesaid period. The assessee held 90% shares in the said Indian Company. The assessee was holding the shares of Urbanedge as capital asset. The shares were subscribed by the assessee in Urbanedge in accordance with the Shareholders Agreement and Share Subscription Agreement dated 02/07/2008. During the period relevant to the assessment year under appeal, the assessee sold entire share holding in Urbanedge to Sarim Holdings Private Limited(SHPL) for a consideration of USD 100. In the transaction of sale of shares, the assessee suffered capital loss of Rs.112,04,62,401/-. The assessee filed its return of income for Assessment Year 2015-16 declaring loss of Rs.112,04,62,401/-. The Assessing Officer in draft assessment proceedings concluded that the assessee has earned capital gain on sale of shares Rs.12,96,82,280/-. The assessee filed objections before the DRP against the draft assessment order dated 29/06/2018. The Dispute Resolution Panel (DRP) re-characterized the transaction of investment in shares of Urbanedge as capital financing. The entire findings of the DRP are merely based on surmises and conjectures. The ld.Counsel for the assessee referred to the findings of DRP in para 16.2 to 16.7. The ld.Counsel for the assessee pointed that a perusal of the findings of DRP would show that the same are based on assumptions. The DRP estimated rate of interest @22% on the investment made in shares of Urbanedge. The Assessing Officer based on the directions of the DRP computed interest of Rs.68,49,22,942/- for the period of holding investment i.e. from the date of remittance in the account of Urbanedge to the date of transfer of shares to SHPL. The Assessing Officer thus, made adjustment of interest amount .
3.1 The ld. Counsel for the assessee made three fold submissions:
(i) It is a case of capital loss, therefore, under the provisions of the Act, no tax liability can be fasten on the assessee in respect of loss.
(ii) In case it is held that the transaction of sale of shares has resulted in capital gain as proposed by Assessing Officer in the draft assessment order, the same cannot be taxed in the light of Article -13 of India Mauritius, Double Taxation Avoidance Agreement (DTAA).
(iii) Not admitting but assuming, findings of the DRP are correct, ‘interest’ is defined under Article 11(5). The amount received by the assessee as alleged interest on capital financing does not fall within the definition of interest.
Thus, the income earned by the assessee as alleged interest would fall in residuary clause under Article-22, i.e. ‘Other Income’. Any receipt falling under ‘Other Income’ shall be taxable only in the Contracting State i.e. Mauritius. Hence, by no means the amount received by the assessee on sale of shares is taxable in India. The ld. Counsel for the assessee further placed reliance on the decision of Hon'ble Bombay High Court in the case of CIT vs. Pramerica ASPF II Cyprus Holding Limited, Income Tax Appeal No.1824 of 2016 decided on 12/03/2019.
Per contra, Shri Sunil Umap representing the Department vehemently defended the assessment order. The ld. Departmental Representative placed reliance on the directions of the DRP to contend that the transaction of investment in shares of Urbanedge is that of Capital financing, therefore, the Assessing Officer has rightly made addition in accordance with the directions of the DRP.
We have heard the submissions made by rival sides and have examined the orders of authorities below. The assessee had subscribed 1,01,22,914 equity shares of Urbanedge at a total cost of Rs.93,68,67,936/-. The assessee had subscribed to the aforesaid shares during the period spread over Financial Year 2008-09 to Financial Year 2014-15. The assessee had subscribed the aforesaid shares under Shareholders Agreement and Share Subscription Agreement dated 02/07/2008. It is relevant to mention here that the assessee continue to subscribe to the shares of Indian company at premium till July, 2014. The last trench of investment in equity shares of Urbanedge by the assessee was of 64521 equity shares on 30/07/2014 @ Rs.76 per share. In August 2014, the assessee sold his entire share holding in Urbanedge at a paltry consideration of USD 100. Thus, apparently suffering a capital loss of Rs.112.04 crores.
The manner in which the entire transaction of investment in shares and thereafter, transfer of shares by the assessee to Sarim Holding Private Limited raises suspicion. No plausible reason whatsoever was offered by the assessee before the Assessing Officer for selling the shares of Urbanedge at a meager cost of USD 100 (equivalent to Rs.6040 at the relevant time). The Assessing Officer invoked Rule 11UA of the Income Tax Rules, 1962 to determine the fair market valueof unquoted shares and worked out the cost of shares of Urbandedge as on 31/03/2014 Rs.105.36 per share. The same value was adopted by the Assessing Officer as fair market value on the date of sale of shares i.e. 20/08/2014. Thus, the Assessing Officer computed capital gain on sale of shares Rs.12,96,82,283/-.
In objections filed by the assessee against the Draft Assessment order before the DRP, the DRP examined the entire transaction of sale of shares by assessee to Sarim Holdings Pvt. Ltd. The DRP also examined the terms and conditions of the agreement under which the shares were subscribed by the assessee. The DRP after examining Share Purchase Agreement entered into between the assessee, Sarim Holding Private Limited , Urbanedge and Aromatic Hotels Pvt. Ltd. observed as under:
“12……….Although the agreement mentions the cost of the shares at US$ 100 because of senior debt outstanding from the company, no modalities have been provided as to how the figure of US$ 100 has been arrived at as the fair price of the assessee's stake in the company. As already discussed, the bank debts are secured debts and there is no doubt that the Urbanedge has sufficient assets in form of land and building to meet these liabilities. As such, the garb of loans outstanding with Urbanedge as the reason for low value of the transaction is not found to be tenable.”
The DRP further observed that the assessee had created sham evidences to show that efforts were made for finding of buyer for the shares. The DRP after search/investigation established the connection between the promoters of Urbanedge and SHPL. The observations of the DRP in para 14.2 are relevant. The same are reproduced hereunder:
“14.2.1 The above detail is dated I5lh November, 2010 i.e. the very period during which the Chandigarh hotel property was being developed by these very promoters. It is clear that Bala Murughan Kamallakharan is not merely a first cousin of Kumar Sitaraman but is also a person who is closely associated with the hotel business of the group right from the beginning and is an integral a part of the same group handling the financial affairs of the group outside the country. “14.2.2 The DRP also notes that the AO has sought certain information with reference to Sarim Holdings Private Limited or SHPL from Mauritius under Article'26 of the DTAA. It is noted that SHPL has been incorporated on 26th June, 2014 by Bala Murughan Kamallakharan i.e. after the email sent by Udday on 6th June 2014 and this company SHPL was incorporated as a single shareholder and single director company. Through a resolution dated 30th September, 2014, Mr Bala Murughan Kamallakharan had appointed Mr Kumaran Sitaraman, the original promoter of Urbanedge, as the authorized representative of SHPL to attend Board meetings of Urbanedge. Hence, it is clear that SHPL or Bala Murughan Kamallakharan are not independent parties entering into agreement but they are a part of the group of original promoters and associated with the promoters since 2010 onwards.” Here it is also imperative to take note of the findings of the DRP explaining as to how a make believe transactions were entered between the assessee and SHPL for transfer of shares to the real owners. The DRP has summed-up its findings on dubious transaction of transfer of shares in para 15 of the directions.
After having given categoric findings on the structured transaction of transfer of shares to the real owners, the DRP has gaffed in holding that it is a case of capital financing. The findings of the DRP that role of the assessee is more in the nature of capital financing are based merely on surmises and conjectures without there being any plausible material in support of this hypothesis. The DRP purely on assumption has observed that, “………. the assessee seems to have been separately compensated appropriately for surrendering this investment to the promoters.” . Thereafter, the DRP estimated 22% rate of interest on the investments from the date of remittance of the amount in the account of Urbanedge to the date of transfer of shares to SHPL. No basis whatsoever has been cited by the DRP to hold 22% rate. The rate has been adopted purely on adhocism.
After having examined the orders/direction of the Assessing Officer / DRP, we are of considered view that it is a transaction of sale of shares by the assessee to SHPL. The DRP has erred in re-characterizing the transaction as that of capital financing. For the detailed reasons given above, the addition made by the Assessing Officer on the directions of the DRP are unsustainable, hence, liable to be deleted. We hold and order, accordingly.
The assessee succeeds on ground- D 3.e. No submissions were made by the ld. Counsel for the assessee on other grounds of appeal, hence, the same are not deliberated upon at this stage. The appeal of the assessee is allowed protanto.