SINDYA SECURITIES AND INVESTMENTS PRIVATE LIMITED,CHENNAI vs. ACIT,CORP.CIRCLE-6[2], CHENNAI

आयकर अपीलीय अिधकरण “बी” �ायपीठ चे�ई म�। IN THE INCOME TAX APPELLATE TRIBUNAL “B” BENCH, CHENNAI माननीय �ी महावीर िसंह, उपा ! एवं माननीय �ी मनोज कुमार अ&वाल ,लेखा सद) के सम!। BEFORE HON’BLE SHRI MAHAVIR SINGH, VP AND HON’BLE SHRI MANOJ KUMAR AGGARWAL, AM आयकरअपील सं./ (िनधा*रण वष* / Assessment Year: 2017-18) M/s. Sindya Securities & Investments Pvt. Ltd. ACIT बनाम/ No.609, Lakshi Bavan, V Floor Corporate Circle 6(2) Sundaram Avenue, Mount Road Chennai Vs. Nungambakkam, Chennai-600 006. �थायीलेखासं./जीआइआरसं./PAN/GIR No. AALCS-3297-B (अपीलाथ�/Appellant) : (� थ� / Respondent) अपीलाथ�कीओरसे/ Appellant by : Shri T. Banusekar (CA) & Shri Vishwa Padmanabhan,(CA) - Ld.ARs � थ�कीओरसे/Respondent by : Dr. S. Senthil Kumaran (CIT) – Ld. DR सुनवाईकीतारीख/Date of Hearing : 03-08-2023 घोषणाकीतारीख /Date of Pronouncement : 08-09-2023 आदेश / O R D E R Manoj Kumar Aggarwal (Accountant Member)

1. For that the order of the Principal Commissioner of Income tax is contrary to law, facts and circumstances of the case to the extent prejudicial to the interest of the appellant and at any rate is opposed to the principles of equity, natural justice and fair play. Provisions of Section 263 not applicable 2.For that the Principal Commissioner of Income Tax failed to appreciate that there was no error or prejudice much less both to warrant the invocation of the provisions of Section 263. 3. For that the provisions of section 263 are not invocable in the facts and circumstances of the case. Chargeability of proceeds received on termination of call option agreement: 4. For that the Principal Commissioner of Income Tax erred in not appreciating that the proceeds received on termination of call option agreement were to be treated as capital gains. 5. For 'that the Principal Commissioner of Income Tax erred in considering the proceeds on termination of call option agreement as assessable under the head 'Business or Profession' 6. For that the Principal Commissioner of Income Tax erred in considering that the impugned proceeds would be chargeable to tax as income u/s.28(va) of the Act 7. For that and without prejudice, the Principal Commissioner of Income Tax erred in not appreciating that revision proceedings cannot be initiated when two views are possible and where one of the views has been adopted by the Assessing Officer. 8. For that the Principal Commissioner of Income Tax erred in not considering the explanations and submissions furnished by the appellant Set aside of issue relating to set off of business loss 9. For that the Principal Commissioner of Income Tax erred in setting aside the issue relating to set off of business loss against long term capital gain without discussing the submissions made by the appellant on the same. Set aside of issue relating to chargeability of bank interest 10. For that the Principal Commissioner of Income Tax erred in setting aside the issue relating to chargeability of bank interest without discussing the submissions made by the appellant on the same. Set aside of issue relating to disallowance_uls.14A 11. For that the Principal Commissioner of Income Tax erred in setting aside the issue relating to disallowance made u/s.14A without discussing the submissions made by the appellant on the same.

3.2 The Ld. CIT-DR further submitted that Ld. AO did not verify the genuineness of the investment activity of the assessee company since the financial statements would show that the assessee was merely acting as conduit for making investments for Kalpataru group in order to exploit 2G license of Aircel Ltd. There was no other activity carried out by the assessee. The activity of the assessee, as per Ld. CIT-DR, was not in accordance with the activity of investment company as defined in Rule 1A(g) of Wealth tax Act, 1957. The assessee was mainly incorporated for the sale and purchase of 2G license indirectly by way of aforesaid activity. The intention of the assessee company was to be examined to find out whether the above income received on cancellation of call option agreement was a business activity or not. But Ld. AO simply accepted the returned income without examining the true nature of the activity carried out by the assessee. It is clearly established that the said activity of the assessee was only to earn profit by termination of its right and the same, therefore, was to be taxed as business receipts only. The contention of the assessee that the said receipts would be capital receipts could not be accepted in view of the decision of Hon’ble Apex Court in the case of Dalmia Cement Ltd. (105 ITR 633) wherein it has been held that the intention of the assessee has to be examined to determine the nature of the activity. 3.3 The Ld. CIT-DR submitted that para (F) of termination agreement clearly indicate that the payments received by the assessee was in relation to non-compete and non-solicit application. The aforesaid facts were not verified by Ld. AO and Explanation 2 to Sec. 263 was applicable. Relance has been placed on the decision of Hon’ble High Court of Gauhati in the case of CIT vs. Jawahar Battacharjee (24 Taxmann.com 215) as well as the decision of ITAT Chennai Special bench in Rajalakshmi Mills Ltd. vs. ITO (121 ITD 343) to support the application of Sec.263. 3.4 The Ld. CIT-DR also referred to the decision of Hon’ble High Court of Delhi in CIT vs. Jansampark Advertising & Marketing Pvt. Ltd. (56 Taxmann.com 286) wherein it was held that it was necessary on the part of the appellate authorities to ensure effective enquiry, if AO fails to conduct proper enquiry. The decision of Hon’ble Apex Court in Kapurchand Shrimal vs CIT (131 ITR 451) was also cited which held that appellate authority has the jurisdiction as well as the duty to correct all errors in the proceedings under appeal and to issue, if necessary, issue appropriate directions to the authority against whose decision the appeal is preferred, to dispose of the whole or any part of the matter afresh unless forbidden from doing so by the statute. 3.5 The Ld. CIT-DR thus submitted that in the present case, Ld. AO has not made enquiry on the taxability of receipt of sum of Rs.100.50 Crores which falls under the revisionary jurisdiction as per Explanation-2 to Sec.

4.4 Regarding the argument that the order was passed without making relevant enquiries, Ld. AR relied on the decision of Hon’ble Delhi High Court in the case of CIT vs Usha International Ltd. (348 ITR 485) which held that when a regular order of assessment is passed in terms of the said sub-section (3) of section 143, a presumption can be raised that such an order has been passed with due application of mind. It is well known that a presumption can also be raised to the effect that in terms of clause (e) of section 114 of the Indian Evidence Act, the judicial and official acts have been regularly performed. If it was to be held that an order which has been passed purportedly without application of mind would itself confer jurisdiction upon the assessing officer to reopen the proceeding without anything further, the same would amount to giving premium to an authority exercising quasi-judicial function to take benefit of its own wrong. Therefore, once the relevant facts are placed on record, it is presumed that Ld. AO has looked into the same and made appropriate enquiries. The Ld. AR distinguished the case laws being relied upon by Ld. CIT-DR and submitted that the same do not apply to the present case. 4.5 Regarding voluntary disallowance u/s 14A as offered by the assessee but missed by Ld.AO, it has been submitted that the assessee has not earned any exempt income during the year and hence the question of disallowance u/s 14A do not arise as per the decision of Hon’ble Apex Court in the case of State Bank of Patiala vs CIT (259 Taxman 314) and CIT vs Chettinad Logistics P. Ltd. (257 Taxman 2). The Ld. AR took support of CBDT Circular No.14 (XL-35) dated 11.04.1955 which state that AO should not take advantage of the ignorance of the assessee. 4.6 The Ld. AR also supported the case of the assessee on merits. It has been submitted that in terms of Explanation-2 to Sec. 2(14), the term ‘property’ includes and shall be deemed to have always included ‘any rights in or in relation to an Indian Company’, including rights of management or control or any other rights whatsoever. In the present case, the right to buy shares of Aircel Ltd. has been relinquished in favour of Global Communications Service Holdings Ltd. (GCSH) against consideration of Rs.100.50 crores. The call options being the right to purchase shares of Aircel Limited clearly fall within the purview of the term ‘capital asset’. There is transfer of profit earning apparatus of the company and hence the consideration has to be treated as capital in nature. The consideration so received by the assessee pursuant to the termination of the call option agreement resulting in relinquishment of the right to purchase the shares of Aircel Ltd. will have to be treated as a transfer under Section 2(47) exigible to tax u/s 45 of the Act. The cost of the acquisition of the right would be deemed to be ‘nil’ in terms of Sec. 55(2)(b). Therefore, the computations made by the assessee under the head ‘capital gains’ was correct. 4.7 The Ld. AR further submitted that that the provisions of Sec. 28(va) would not be applicable. The clause (a) to Sec. 28(va) would apply to any sum received or receivable in cash or kind under an agreement for not carrying out any activity in relation to any business or profession. In the present case, the consideration was not received for not carrying out of any activity in relation to any business or profession. The assessee company was established for the purpose of investing in shares of Aircel Ltd. and it was in that connection that the call option agreement was entered into. The termination of the call option relinquishes the right of the assessee company to buy shares of Aircel Ltd. in favour of another entity. It does not debar the assessee company from investing in the shares of Aircel Ltd. Thus, there is no element of non-compete obligation inherent in the agreement which would trigger the provisions of Sec. 28(va) as alleged in the impugned order. 4.8 The Ld. AR further submitted that non-compete clause was in connection with the sale and purchase agreement which was mentioned in the call option agreement in the context of the overall transactions of restructuring that were envisaged. The sale and purchase agreement dated 14.09.2016 was a separate agreement entered into between the assessee company, its promoters and GCSH setting out terms for the sale of shares which would be acquired by the assessee pursuant to a merger of M/s Deccan Digital Networks Pvt. Ltd. (DDNPL) with Aircel Ltd. The consideration of Rs.100.50 crores received by the company was not in connection with the sale and purchase agreement which has been referred to in the relevant clause. 4.9 The Ld. AR also controverted the other submissions made by Ld. CIT-DR. It was submitted that the definition given in the Wealth Tax Act was not relevant to the discussion at hand. Moreover, Ld. Pr. CIT, vide para 6 of the impugned order, specifically noted that the primary object of the assessee company was to carry on the business of an investment company. Finally, Ld. AR submitted that the aforesaid transactions resulted into giving up a source of income itself in favor of another company and therefore, the same should be treated as transfer of capital asset resulting in capital gains. 4.10 On the issue of disallowance u/s 14A, it has been submitted that there is no exempt income in this year and this disallowance is unwarranted. On the issue of bank interest not offered to tax, Ld. AR demonstrated that the same has been reckoned as business income and treatment of interest as business income is tax neutral and does not prejudice the revenue in any manner. On the issue of set off of business losses, Ld. AR submitted that there was no bar against setting-off of business losses against Long Term Capital Gains in terms of Sec.71(2). 4.11 The Ld. AR summarized its arguments, inter-alia, by submitting that the impugned issue of head of income was already examined by Ld. AO during the course of original assessment proceedings. Based on appreciation of facts, Ld. AO has taken a correct view that the impugned income was to be assessed as capital gains. Nevertheless, Ld. AO adjudicated the issue with due application of mind and took one of the possible views. Lastly, the other issues as flagged by Ld. Pr. CIT were not discussed in the impugned order and therefore, the revision could not be made on the remaining issues.

DDNPL was holding 35% shares of Aircel Limited. As per a call option agreement dated 20.01.2006, the assessee company was given a right to purchases 2,43,24,324 equity shares of Aircel Ltd. held by DDNPL at a price as prescribed in the agreement. On 19.09.2016, M/s GCSH entered into an agreement with the assessee company for termination of call option agreement and paid Rs.100.50 Crores to the assessee company which was offered to tax as capital gains. The Ld. Pr. CIT noted that as per call option termination agreement, the assessee received the sum in relation to the non-compete and non-solicit obligations. As per the provisions of Sec. 28(va), the aforesaid sum was to be treated as business income and not as capital gains as offered by the assessee. The assessment as business income would imply higher tax outgo for the assessee. 6.2 The second issue was that the assessee wrongly set-off current year business losses of Rs.24.87 Lacs against Long Term Capital Gains (LTCG). The third issue was that the assessee failed to add back bank interest of Rs.3.54 Lacs in the return of income. The fourth issue was that the assessee made investments and disallowance as per Rule 8D(2)(ii) works out to be Rs.40.88 Lacs. However, Ld. AO failed to disallow the same at the time of completing the assessment. Therefore, the assessment order was held to be erroneous and prejudicial to the interest of the revenue and the assessee was show-caused on all these aspects. 6.3 Regarding call termination receipts, the assessee submitted that this issue was examined by Ld. AO at the time of original assessment proceedings itself. The assessee’s submissions, in the regard, as made during the course of original assessment proceedings were brought to the notice of Ld. Pr. CIT. The same has been extracted on page nos. 5 to 8 of the impugned order. In these submissions, the assessee submitted that the assessee was an investment company. The entire funds were invested in certain shares which were held as long-term investments. The equity shares in DDNPL were held as long-term investments under the head ‘non-current investment’. The purpose of call option agreement with DDNPL was to purchases the shares of Aircel Ltd. which were held by DDNPL. Considering that the shares were supposed to vest in the assessee company and the same were to be held as investment and further that the call option was not exercised, it should be treated as capital asset. The right to purchase the share was a capital asset. The capital asset as defined in Sec. 2(14) would include property of any kind. As per Explanation as inserted vide Finance Act, 2012, ‘property’ include any rights in relation to an Indian Company. Therefore, the call option being right to purchase shares of Aircel Ltd. clearly fall within the purview of definition of capital asset. The compensation so received on termination of call option agreement was ascribable to termination of rights in relation to proposed investment and it should, therefore, be construed as capital receipt and not revenue receipt which would be liable to be assessed under the head ‘capital gains’ as offered by the assessee. 6.4 The assessee, thus, assailed the revisionary proceedings on this point. The assessee also submitted that Explanation 2 to Sec. 263 would not apply since complete details, in this regard, were filed during the course of original assessment proceedings and lack of enquiry on the part of Ld. AO could not be alleged. It was also averred that in case where two views are possible, revision was not justified. The assessee further submitted that clause (va) of Sec.28 would not apply since this clause apply to sums received under an agreement for not carrying out any activity in relation to any business and not in a situation where there is transfer of a right to carry on business itself. The assessee was an investment company and formed solely for the purpose of investing in Aircel Limited. Therefore, call option agreement was to enable the assessee to purchase share of Aircel Ltd. in future. Subsequently, the agreement was terminated for consideration of Rs.100.50 Crores. In effect this would imply transfer of business itself. It could not be said that a particular activity of the business has been stopped and the said sum would be chargeable u/s 28(va). 6.5 Regarding set-off of business losses against capital gains, it was submitted that the same was very much permissible and there was no bar against the same as per the provisions of Sec.71(2). Regarding Bank interest, it was submitted that the same was offered as business income. Regarding disallowance u/s 14A, the assessee submitted that the investment did not fetch any exempt income during the year and therefore, no such disallowance could have been made. 6.6 However, rejecting assessee’s submissions and after verifying Memorandum of Association (MOA), Ld. Pr. CIT held that the assessee company was formed mainly for the dealing in shares and therefore, impugned income was to be assessed as ‘business income’ only. The action of Ld. AO in not seeing the MOA while dealing with this issue during the assessment makes the order erroneous and prejudicial to the interest of revenue Therefore, all the four issues were set aside to the fie of Ld. AO for making detailed examination after affording opportunity of hearing to the assessee. Aggrieved as aforesaid, the assessee is in further appeal before us. Our findings and Adjudication 7. Upon perusal of assessment order, it could be seen that one of the notices u/s 142(1) was issued to the assessee on 05.10.2019 calling for certain details. The assessee filed requisite details vide replies dated 25.11.2019, 17.12.2019 and 27.12.2019. The assessment order takes note of the replies of the assessee in opening paragraph. In notice dated 05.10.2019, the assessee was, inter-alia, directed to give a detailed note on business activity carried on by it during the year along with audited financial statements and return of income. The assessee, vide detailed reply dated 17.12.2019, furnished various details and submissions. In Para-2 of the reply, the assessee explained the transaction of Termination of Call option agreement and substantiated its stand as to why the aforesaid income would be taxed as capital gains. To support the same, the assessee relied on the decision of Hon’ble Supreme Court in the case of Vodafone International Holdings BV (341 ITR 1) which triggered amendment to Sec. 2(14) and the amendment provide that property would include any rights whatsoever in relation to an Indian Company. Therefore, the right to purchase the shares would fall within the purview of definition of capital assets post amendment to Sec. 2(14). The consideration received subsequently upon termination of call option agreement resulting into relinquishment of right to purchase the shares would amount to transfer u/s 2(47) exigible to tax u/s 45. The assessee also made submissions on disallowance u/s 14A and submitted that the assessee inadvertently missed to allow entire expenditure incurred during the year for Rs.24.87 Lacs and submitted that the gains could be increased by that amount. Along with this reply the assessee furnished Call option agreement as well as call option termination agreement. Considering assessee’s reply, Ld. AO framed the assessment accepting the returned income of the assessee. In the light of AO’s query and the assessee’s reply thereto, it could be said that the impugned issue of nature of sale consideration on Call Termination Agreement was very much considered by Ld. AO during the course of assessment proceedings. The view taken by Ld. AO was one of the possible views which, considering the amendment to Sec. 2(14), was one of the possible view.