ASST. COMMISSIONER OF INCOME-TAX , MUMBAI vs. BONA SERA HOSPITALITY PVT. LTD., MUMBAI

Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) is erred in not holding that transaction entered into by the assessee company is legitimate financial restructuring and as such the principle of laid down by Apex Court in the case of McDowel and Co. vs. CTO (1984) 154 ITR 148 will not applicable in the case of the assessee company?

Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) is erred in restricting the disallowance u/s. 14A to the extent of exempt income earned ignoring the fact that the AO has computed disallowance u/s 14A as per rule 8D?

Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) is erred in restricting the disallowance u/s. 14A to the extent of exempt income earned ignoring the explanation amended to section 14A with retrospective effect which provides for disallowance u/s. 14A even if no income earned during the year.

The Appellant prays that the order of the CIT(A) on the above grounds be set aside and that of the Assessing Officer be restored

There are two issues raised by the Revenue in the present appeal through its four grounds. Ground No. 1 and 2 are in respect of addition of Rs. 2,83,11,020/- treating the transaction entered into by the assessee as colourable device for financial restructuring. Ground Nos. 3 and 4 are in respect of disallowance u/s. 14A, ignoring the fact that disallowance was computed u/s.14A r.w.r. 8D. We first take up the first issue by ground Nos. 1 and 2. 3.1. Brief facts of the case are that assessee filed its return of income on 05.09.2014 reporting total income at Nil. Former name of the assessee is Bona Sera Hospitality Pvt. Ltd. which has been changed to Shawman Software Pvt. Ltd. Assessee is engaged in the business of customized software, maintenance of software, trading of hardware and software.

Facts of the matter are that assessee received loan from Dr. Francis Pinto in various financial years prior to the financial year

1. Assessee had also provided for interest expense on the said loan of Rs. 14,69,437/- for the year ended on 31.03.2011 which after TDS was Rs. 13,22,493/-. Since, assessee was facing liquidity crisis, it could not pay the said interest and was capitalized and added to the outstanding loan amount. Accordingly, the total outstanding summed up to Rs. 3,03,22,493/-.

2. Dr. Francis Pinto is the Promoter Director of the assessee, since its incorporation. He is a well-known personality and is a physician who was formerly CEO of Nicholas Piramal India Ltd. He has also been part of the Board of several other companies. He provided financial assistance to the assessee since its inception and has been residing in United Kingdom. Dr. Francis Pinto is the promoter Director who has granted loan to the assessee in various financial years along with his son Mr. Dev Pinto, so as to enable it to grow into its business.

3. Other vital fact noted from the records are that the years in which loans were received by the assessee i.e., financial year 2009-10, 2010- 11 and 2012-13, these were the years which were subjected to scrutiny

4. Also, in the case of assessment proceedings for AY 2012-13, ledger accounts of all the Directors and shareholders were called for by the ld.

5. Also, there is no fresh infusion of funds in the year under consideration except for conversion of the loan liability in the books of the assessee, into share capital and premium by issuing shares to Dr. Francis Pinto jointly with his son Mr. Dev Pinto. During the year under consideration, against the said outstanding loan including interest, assessee had issued 7,395 shares of Rs. 10/- each at a premium of Rs.4,090.40 per share, totalling to Rs. 3,03,22,458/- to Dr. Francis Pinto jointly with his son Mr. Dev Pinto. Since, assessee issued its shares against the outstanding loan, ld. Assessing Officer held the said transaction as a sham transaction.

From the perusal of the impugned assessment order, following points emerges which formed the basis at the end of the ld. Assessing Officer to take an adverse view. The same are listed as below:- i. According to the ld. Assessing Officer, fair market value of the shares issued by the assessee as per Rule 11UA of the Income Tax Rules, 1962 (the Rules) is Rs.272/- per share whereas, assessee has issued the same at Rs. 4,100.40 [Rs.4,090.40 premium + Rs. 10/- face value per share]. According to the ld. Assessing Officer,

2. In the first appeal before the ld. CIT(A), above stated factual position was reiterated with corroborative evidences placed on record. From the perusal of the first appellate order, we find that ld. CIT(A) has taken cognizance of facts and documentary evidences with proper analysis. He has also taken note of the assessments completed of the preceding years and the details furnished by Dr. Francis Pinto in those assessment proceedings. He has observed that it is on account of stringent financial conditions of the assessee, which compelled it to undertake legitimate financial restructuring by converting the outstanding loan including interest thereon into share capital and share premium, more importantly, when the said loan alongwith interest was obtained from its own Promoter Director. Undertaking such financial restructuring by way of conversion of loan into equity, is the sole prerogative of the assessee to meet the challenges faced by it in the conduct of its business. He has noted about the compliance made by the assessee on accounting and reporting of the transaction which has been subjected to scrutiny by the Department in three preceding assessment years, when the loans were obtained. Relevant observations and findings of ld. CIT(A) while giving relief to the assessee are extracted below for ready reference: “Assessee has also submitted the copies of bank accounts of Dr. Francis Pinto, jointly with his son, Mr. Dev Pinto from where the amounts were given to the company in respective years as mentioned above. The appellant has also submitted the copy of Form No. PAS-3, Copy of Board resolution regarding the above said decision and the details of average performance of the company.

3. Ld. Sr.DR has made a written submission on the perversity of the order of ld. CIT(A) since assessee resorted to a colourable devise by way of financial restructuring to introduce unaccounted funds as unaccounted premium.

We have heard both the parties and perused the material on record. We have given our thoughtful consideration to the factual position and exercise undertaken by the assessee of converting its loan liability into share capital and premium. The most clinching fact remains uncontroverted about receipt of loan by the assessee in the past three assessment years, which have been subjected to scrutiny assessment by the Revenue wherein no adverse view was taken on the said loan transactions. Moreover, queries were raised by the ld. Assessing Officer on those assessment proceedings on the Promoter Director by issuing notice u/s. 133(6) which were duly complied with, furnishing all the required details. Copy of such compliance is already extracted in the above paragraph. The said loan liability remained in the books of accounts of assessee duly reported in its audited balance sheet for the year under consideration. It is also a fact on record that no fresh funds have been infused during the year under consideration. On the touch stone of these two clinching facts, we fail to understand how the charging provision of section 4 and 5 of the Act gets triggered

For the second issue in the respect of disallowance made u/s.14A, admitted fact is that assessee has earned exempt income of Rs.15,000/- only during the year. Ld. Assessing Officer has made a disallowance of Rs. 8,55,082/- by applying Rule 8D. The issue before us is no longer res integra as the settled position is that disallowance u/s.14A r.w.r. 8D cannot exceed the exempt income earned by the assessee in a year. Further, amendment brought by the Finance Act, 2022 by introducing

In the result, appeal of the Revenue is dismissed.