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Income Tax Appellate Tribunal, ‘C’ BENCH, CHENNAI
Before: SHRI MAHAVIR SINGHAND SHRI MANOJ KUMAR AGGARWAL
आदेश /O R D E R PER MAHAVIR SINGH, VP: This appeal filed by the Revenue is arising out of the order of the Commissioner of Income Tax (Appeals)-V, Chennai in dated 08.12.2006. The assessment was framed by the Income Tax Officer, Company Ward-VI(1), Chennai for the assessment year 2004-05 u/s.143(3) r.w.s. 174(4) & 175 of the Income Tax Act, 1961 (hereinafter ‘the Act’), vide order dated 23.02.2005.
At the outset, the ld.counsel for the assessee drew our attention to order passed by this Tribunal in MA No.25/CHNY/2023, order dated 22.03.2023 whereby the Tribunal has recalled the Tribunal’s order in 21.09.2022 qua ground Nos.2.1 to 2.4 of Revenue’s Appeal. In term of this ld.counsel for the assessee stated that he is arguing only ground Nos.2.1 to 2.4.
The only issue remains now in this appeal of revenue is this ground Nos.2.1 to 2.4 as regards to the order of CIT(A) deleting the disallowance made by AO on account of remission of liability u/s.41(1) of the Act for an amount of Rs.22,36,02,749/-.For this, Revenue has raised following grounds:- 2.1. The learned CIT(A) erred in deleting the disallowance of Rs.22,36,02,749/- on account of remission of liability u/s,41 (1) on three counts (i) The transaction between two share holders cannot in anyway affect the capital base of a company nor it can give rise to a remission of liability by a shareholder with regard to the assessee company.
(ii) The aggregate value of the liability did not change. Only the value of the liability got regrouped under some other heads.
(iii) M/s. Kasturi & Sons Ltd. has entered the incurred loss in books of account only as a provision for a loss on sale of investments and has not claimed any long term capital loss in its I.T.return for the a-y 2005-06.
2.2. Having regard to the decision of the Hon'ble Supreme Court in the case of Union of India v. J.K.Synthetics Ltd.(199 ITR 14), wherein the ratio that a cessation of liability for the purposes of Sec.41(1) would mean irrevocable cessation, so that there is no possibility of the liability being revived in future was upheld, the learned CIT(A) ought to have upheld the action of the assessing officer. In the instant case, the learned CIT(A) ought to have seen that there is no possibility of the liability being revived in future.
2.3. The learned CIT(A) ought to have seen that the assessee had stood to gain by conversion of a debt into equity (in a way, converting a creditor into a proprietor of the company), certain advantages being:
(i) In a debt, the company have to pay interest to the creditor whether it earns profit or not, while in an equity, the company pays dividend to the shareholders, only when there is a profit. Thus, the interest liability on a debt is a charge against the profits while the dividend liability arising out of an equity share is an "appropriation of profits".
(ii) Further, in case, the company is unable to pay its debt to its creditors, compulsory winding up of the company may take place, whereas in the case of an equity share-holder, such a contingency does not arise 2.4. The learned CIT(A) failed to appreciate that merely because M/s.Kasturi & Sons Ltd.(KSL) had not Claimed the Long Term Capital Loss in its I.T.return for the a-y 2005-06, it cannot be said that the amount cannot be assessed u/s.41(1) of the 1.I.Act, in the hands of the assessee company.
Briefly stated facts are that the assessee company was 100% subsidiary of Kasturi & Sons Limited (in short ‘KSL’). The balance sheet of assessee company filed along with the return of income and from where the AO noticed that the KSL has advanced unsecured loan of Rs.28,34,26,749/- as on 31.03.2004 to assessee. According to AO, this amount has been taken by assessee in the course of its business for the purpose of developing golf course. The AO further noted that subsequently majority shares in management of the company was transferred to one Shri K.C. Palanisamy vide agreement dated 19.07.2004 between Shri K.C. Palanisamy, KSL and the assessee. During the course of taking over of the company, the share capital of Rs.3 crores consisting of 30 lakh shares of Rs.10/- each was increased to share capital of Rs.27 crores consisting of 27 lakh shares of Rs.10/- each. Consequently increased share capital of Rs.24 crores consisting of 27 lakhs shares of Rs.10/- each was allotted to KSL by the assessee company. The AO noted that Shri K.C. Palanisamy has taken over liability pertaining to KSL of Rs.69,87,331/- only along with the takeover of the company and as per certified balance sheet of the assessee as on 31.08.2004, which shows the liability of assessee towards KSL of Rs.67,52,749/- as against an amount of Rs.28,34,26,749/-. The AO asked the assessee to explain vide letter dated 07.02.2005 about the reduction of its credit from its debit from 28.34 crores to 0.67 crores towards KSL. The assessee explained vide letter dated 09.02.2005, the balance due to the assessee company, Sporting Pasttime India Ltd., (SPIL) as under:-
Opening Balance as on 01.04.2004 Rs.28,34,26,749 2. Add: Amount advanced to M/s. SPIL by M/s. KSL from 19.05.2004 to 31.07.2004 Rs. 7,66,000 Total Rs.29,12,92,749 3. Less: Amount received from M/s. SPIL on 12.04.2004 out of their borrowings from Bank Rs. 4,45,40,000 Rs.24,67,52,749 4. Less : Value of 240 lakhs equity shares of Rs.10/- each allotted by M/s. SPIL Rs.24,00,00,000 Balance due by M/s. SPIL Rs. 67,52,749 The AO was of the view that the KSL in view of its book debts from the assessee ‘SPIL’ of Rs.29,12,92,749/- received money and monies worth of shares totaling to Rs.6,76,90,000/- and gave up the claim over liabilities of Rs.22,36,02,749/- and thereby the AO invoked the provisions of section 41(1) of the Act and assessed this amount of Rs.22,36,02,749/- as income of the assessee. Aggrieved, assessee preferred appeal before CIT(A).
The CIT(A) after considering the facts in entirety noted that the transaction between the two shareholders cannot in any way affect the capital base of the company not it can give raise to liability by shareholder with regard to the subject company and hence, it cannot be assessed as income in the hands of the assessee and thereby, deleted the addition by observing in para 5.2.1 as under:-
5.2.1 The arguments put forward by the learned authorised representative and the contentions raised by the A.0. in the assessment order have carefully been examined. It is noticed that though by virtue of the same agreement, 240 lakhs shares worth Rs. 24 crores were allotted to M/s. KSL which simultaneously had transferred those shares to Shri K.C. Palanisamy and his nominees at Re. 1/- (approximately) per share for a total consideration of Rs. 2,31,00,000, it did not at all affect the face value of shares in the appellant's books of accounts. The balance sheet continued to reflect the issued equity share capital at Rs. 27 crores. It is found to be clearly a case where the shares of the appellant company had merely changed hands, though at a very lesser value but the appellant's liability towards any future payments to the share holders did not reduce at all. The appellant company after the take-over and subsequent transfer of shares continued to remain liable to pay Rs. 27 crores to the new shareholders belonging to the K.C. Palanisamy group, instead of M/s. KSL. I tend to concur with the views of the learned authorised representative that the transaction between the two shareholders cannot in any way affect the capital base of a company nor it can give rise to a 'remission of liability' by a shareholder with regard to the subject company. In the instant case the aggregate value of the liability, as appearing in the balance sheet of the appellant company, did not change. Only the values of liabilities got regrouped under some other heads. The A.O. has failed to visualize this simple aspect. The A.O. is also found to have erroneously applied the judgement of the Hon'ble Supreme Court in the case of CIT Vs M/s. TVs Iyengar and Sons Ltd. The very first line of the gist of the judgement as contained in the headnote of the reported verdict clearly refers to an amount received in the course of trading transaction, whereas no such trading transaction took place between M/s. KSL and the appellant company in which the members of the KCP group subsequently became the majority shareholders. In the TVS Iyengar's case the assessee had admitted the remission of trading liability and had offered the same as Income by crediting it to the Profit & Loss Account. The facts are clearly distinguishable from those of the appellant company. The verdict of the Hon’ble Supreme Court in the above referred case can by no stretch of imagination be applied to the transactions entered into between the two shareholders, though the time of such transaction coincided with the appellant's take-over process. During the appellate proceeding the A.O. was also required by this office to examine the representatives of M/s. KSL regarding their opinion/view about the impugned transactions. Deposition on oath of the Vice President of M/s. KSL was recorded by the A.O. This was followed by a written reply submitted by the said Vice President. According to M/s. KSL, the sale of shares by it to the K.C. Palanisamy group had definitely resulted in a capital loss, but the same could not be considered at all as a 'remission of liability' in any form. M/s. KSL has reportedly entered the incurred loss in its b0oks of accounts only as a provision for loss on sale of investment. The details relating to the booking of such provisions for loss have been furnished by the learncd A.R. of M/s. KSL before the Assessing Officer who has, in turn, forwarded the details to the undersigned. In his last report dated 06.09.2006 the learned A.O., however, has not agreed to the treatment given by M/s. KSL to the loss arising out of the sale of shares. It is pertinent to mention that M/s. KSL has also not claimed the long term capital loss in its income-tax return for the assessment year 2005-2006. On over all appreciation of the facts and circumstances of the case, I hold that the addition made by the Assessing Officer was totally uncalled for under the law. Accordingly, the same deserves to be deleted. I thus adjudicate the relevant ground of appeal in favour of the appellant company with a direction to the A.O. to delete the addition of Rs.22,36,02,749.
Aggrieved, now Revenue is in appeal before the Tribunal.
We have heard rival contentions and gone through facts and circumstances of the case. We noted that the KSL has provided the funds to its wholly owned subsidiary i.e., the assessee company SPIL for developing a golf course. The KSL has also guaranteed the liability to assessee to the extent of Rs.27 crores. But KSL could not complete the project and they have decided to sell the shares to one Shri K.C. Palanisamy and its group companies and accordingly, the same has been sold vide settlement agreement. As per this arrangement, in settlement of the debt due to KSL of Rs.27.67 crores, 240 lakh shares were allotted for Rs.24 crores at face value of Rs.10/- each and as per agreement KSL sold their share holding of assessee company, SPIL to Cheran Properties Ltd., for a consideration of Rs.2,31,50,000/-. Now before us, the ld.counsel for the assessee also stated that even the share allotment was cancelled by the arbitration award, which was confirmed by NCLT & NCLAT. The ld.counsel also stated that on further appeal before Hon’ble Supreme Court, by an order dated 24.04.2018, confirmed the arbitration award and status quo has been restored as if transfer had not taken place. This fact is noted by assessee in its balance sheet for the year ended 31.03.2019 and the relevant is reproduced as it is:- Sporting Pastime India Limited Notes to financial statements for the year ended 31st March, 2019 Note 15: Earnings per Share Year ended Year ended Particulars 31st Mar 2019 31st Mar 2018 Net Profit/(loss) attributable to -710.97 -0.50 shareholders (Rs.in lakhs) Basic and diluted weightage average no. of 27,000,000 27,000,000 equity shares issued Earnings per share of Rs.10 each (Rs.) -2.63 -0.00 basic and diluted Note 16: Legal Disputes An Agreement dated July 19, 2004 was entered into between (i) K.C, Palanisamy (KCP) and (ii) Kasturi and Sons Limited (KSL) and (ii)
Sporting Pastime India Limited (SPIL- a wholly owned subsidiary of KSL) and (iv) Hindcorp Resorts Pvt Ltd whereby KCP agreed to acquire the shareholding, controlling and management interest in SPIL on the terms and conditions set-out in the Agreement.
Thereafter, dispute arose between the parties and in terms of the Arbitration clause in the Agreement the matter was referred to Arbitration Tribunal for adjudication of the dispute. The Arbitration Tribunal passed an Award dated December 16, 2009 restoring the status quo to the position prior to the agreement with regard to the share certificates and the documents of title, and directing KCP to transfer the shares and title deeds of SPL to KSL contemporaneously with KSL transferring, the amount of INR 3,58,11,000/- to KCP, The said Award has reached finality, upon dismissal of the SLP filed by SPIL and K.C.Palanisamy (KCP) in the Supreme Court of India.
Based on the Award, Company filed a Petition No, 36 of 2010 in Company Law Board (CLB) for implementation of the Award, which subsequently got transferred to National Company Law Tribunal (NCLT) as TCP No. 48 of 2016. The NCLT vide its order dated March 6, 2017, directed the implementation of the Award dated December 16, 2009 by making rectification in the Register of Members of SPIL by incorporating the name of Kasturi and Sons Limited in the Register of Members of SPIL and appointed the Deputy Registrar of NCLT as Independent Commissioner to implement the order of NCLT dated March 6, 2017. On April 7, 2017, the rectification of Register of Member of SPIL. was carried out by Deputy Registrar, by duly signing the Register of Members in his capacity as an Independent Commissioner and Kasturi and Sons Limited name has now been registered as the 100% owner in the Register of Members.
However, the NCLT order was challenged by way of an Appeal No. l25 of 2017 in (National Company Law Appellate Tribunal) NCLAT in New Delhi by Cheran Properties Limited (CPL) (one of the Cheran group company controlled by KCP) claiming that they are not bound by the Arbitration Award and the same cannot be enforced against them. The NCLAT after hearing the parties was pleased to dismiss the Appeal filed by Cheran Properties Limited vide its Order dated July 5, 2017 inter-alia holding that there was no merit in the Appeal.
Since, the Board of SPIL is defunct and notice to the Registered Office returned unserved, it was impractical for SPIL to convene the £GM. therefore, in order to expedite the holding of EGM forthwith, KSL has moved the NCLT for convening the EGM of SPL. Accordingly, made a Company Application - CA No.52 of 2017 in NCLT, Chennai. The matter came-up for hearing before the two member bench of NCLT on July 5, 2017. The NCLT after the bearing, appointed an independent chairman to conduct the EGM and fixed July 18, 2017 for holding the EGM of SPIL. In the EGM Mr. R. Ramesh, Mr. K.Venugopal and Mr. S. Padmanabhan were appointed as Directors of SPIL.
In the interregnum, CPL had preferred an SLP in the Supreme Court against the NCLAT order. The Supreme Court vide its Order dated April 24, 2018 dismissed the SLP (C.A.No.010025-010026 / 2017) filed by Cheran Properties Limited. Thus the order of the NCLT dated March 6, 2017 has attained finality.
Upon KSL becoming 100% owner of SPIL and upon appointment of M/s.R. Ramesh, K.Venugopal and S. Padmanabhan as directors of SPIL in an extra ordinary general meeting convened under directions of NCLT, the directors could not function as director, as the online filings of forms/returns that needed to be filed with Registrar in terms of section 152(5) by the Directors(s)/SPIL in the MCA portal were not enabled. Consequently, an application was filed with NCLT seeking direction to the Registrar of Companies, Chennai (RoC) to take the appointment and filing Forms on record, in relation to the said appointment. The RoC took the said appointment on record on 3rd October 2018, upon direction from NCLT.
Although the four directors representing the earlier owner/management (KCP and his nominees) have already retired and thus Vacated the office of director upon expiry of the term of appointment under the Companies Act 2013, they continued to be reflected in the records of RoC as directors in the MCA portal and consequently the Board could not function effectively. An application was moved in NCLT seeking directions to RoC for recording the retirement of said directors and filing of Forms. The RoC, upon directions of NCLT, took on record the retirement/vacation of office of director by the said persons on 28th January 2019.
Thus, the Board of SPIL now consist of three directors who were able to discharge their function as directors only with effect from 2&th January 2019 and the SPIL Board is now under the management of new directors appointed by the KSL.
However the erstwhile Directors of the Board have not handed over various records of the Company like books of accounts, statutory records and registers, forms filed with central, state and local authorities, the title deed to company properties and other assets, share certificates despite legal notice sent them.
The new Board of SPIL has now sought to represent SPIL as its own and distinct from KCP's group in various litigations pending before the Hon'ble Delhi High Court including the one filed by Canara Bank, as secured creditor of Data Access India Limited (DAIL), against KCP and his group companies in the liquidation proceedings filed against DAIL. (SPIL is arrayed as KCP group company due to the fact that Rs.2,500 lakhs was diverted from DAIL when SPIL was under the control and management of KCP.(This money together with interest for the period 2011-2013 has since been remitted back to Canara Bank in 2013, basis the High Court Order; however, interest for the past period was held to be decided later). Having paid the entire amount due to Canara Bank in the year 2013, KSL/SPIL filed application with Delhi High Court seeking discharge of their liability to Canara Bank and also sought to be released from the litigation proceedings. The High Court passed Order directing SPIL to pay interest for the past years (2004-2011) at the rate of 6%o per annum vide its order dated October 8, 2018, and upon payment of said interest directed release of the assets of SPIL from the order attachment passed earlier in the application filed by Canara Bank. SPIL has paid Rs. 908 lakhs to Canara Bank in compliance with the order of the Hon'ble Delhi High Court. Canare Bank, however, preferred an SLP No. 5771 of 2019 in the Supreme Court against the order of Delhi High Court. The Supreme Court after hearing the parties dismissed the SLP filed by Canara Bank.
Apart from above, SPIL has made application in the in Delhi High Court to release SPIL from eight litigation matters (whereas SPIL have been included as party to the proceedings as a group company of KCP) as the liability of SPIL in the connected matters have attained finality consequent to the payment made to Canara Bank. The applications are listed for hearing. This involves considerable amount of procedural steps and the board of SPIL have initiated steps in this respect.
Note 17: Income Tax Dispute The company has an ongoing dispute with the Income Tax authorities in respect of alleged unexplained funds in respect of Rs.25 crores brought in by the erstwhile management in FY 2003-04 on which a tax demand of Rs.1740.24 lakhs is under appeal before the ITAT(Appeal) The company is also having another dispute in respect of the interest income from bank deposits in FY 2012-13 pertaining to deposit made on behalf of Cheran properties Limited by the erstwhile management on which a tax demand of Rs.363.86 lakhs is under appeal before CIT(appeals)
Note 18: Share Application Money A sum of Rs.27 crores were recorded by the erstwhile management to be capital infusion made by the erstwhile management in 2004-05 from certain funds infused into the company. On the basis of a claim for the amount by a banker stating that the amount was infused from an entity over which the banker had a prior claim, High Court ordered inter alia for the reversal of the capital allotted in this regard. The sum has been disclosed by the erstwhile management since then as share application money during previous year. However, since the amount is not related to the company brought in by erstwhile management and since paid to Bank vide court order, there is no Share Application Money as at Balance Sheet date.
We have relied on the substance of the Court Order which has not been challenged so far.”
We noted that this is simpliciter case of transfer of share holding and it cannot be related to waiver of the trading liability holding the same as income of the assessee u/s.41(1) of the Act. Now, after restoring back the same position, nothing survives because after the judgment of Hon’ble Supreme Court affirming the arbitration award as affirmed by NCLT & NCLAT, the original position is reiterated and which is confirmed by assessee in its balance sheet for the year ended 31.03.2009. Hence, this transaction is to be treated as never happened and hence, on this short issue, this ground of Revenue’s appeal is dismissed.
In the result, the appeal filed by the Revenue is dismissed.
Order pronounced in the open court on 18th October, 2023 at Chennai.