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Income Tax Appellate Tribunal, “B” BENCH MUMBAI
Before: SHRI AMIT SHUKLA & SHRI GIRISH AGRAWAL
Assessment Year: 2014-15 Assistant Commissioner of Bona Sera Hospitality Pvt. Ltd. Income Tax, Circle 6(1)(2), (now Shawman Software Pvt. Mumbai Ltd.) 640B, Khorshed Villa, Vs. Khareghat Road, Dadar, Mumbai – 400014. PAN: AAKCS7518L (Appellant) (Respondent) Present for: Assessee : Shri M. M. Golwala, CA Revenue : Shri Leyaqat Ali Aafaqui, Sr. DR Date of Hearing : 30.07.2025 Date of Pronouncement : 30.09.2025 O R D E R
PER GIRISH AGRAWAL, ACCOUNTANT MEMBER:
This appeal filed by the Revenue is against the order of Ld. CIT(A), Delhi, vide order no. ITBA/NFAC/S/250/2023-24/1059251731(1), dated 01.01.2024 passed against the assessment order by ITO 8(2)(1), Mumbai, u/s. 143(3) of the Income-tax Act, 1961 (hereinafter referred to as the “Act”), dated 28.12.2016, for Assessment Year 2014-15.
Grounds taken by the Revenue are reproduced as under: 01. Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) is erred in directing the AO to delete the addition of Rs. 2,83,11,020/- treating the transaction entered into by the assessee company as a legitimate financial restructuring and not legitimate tax planning as noted by the AO in the assessment order?
2. 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? 03. 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? 04. 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. 05. 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 Bona Sera Hospitality Pvt. Ltd. AY 2014-15 relevant to the assessment year under consideration. The loans were received in the financial year 2009-10, 2010-11, 2011-12 totalling to Rs. 2,90,00,000/-, details of which is tabulated below. Date Amount (Rupees) Remarks 20/11/2009 45,00,000 22/02/2010 70,00,000 24/02/2011 10,00,000 02/03/2011 20,00,000 31/03/2011 13,22,493 Interest (net) 22/09/2011 40,00,000 22/09/2011 20,00,000 Recd from Mr. Dev Pinto 31/10/2011 60,00,000 15/11/2011 25,00,000 Total 3,03,22,493 4.1. 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/-.
4.2. 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.
4.3. 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 Bona Sera Hospitality Pvt. Ltd. AY 2014-15 assessment by the Department. Relevant details were called by the ld. Assessing Officer in the course of assessment proceedings. In the assessment year 2010-11, ld. Assessing Officer had issued notice u/s.133(6), calling for information in respect of transaction with the assessee undertaken by Dr. Francis Pinto. He had filed his reply vide letter dated 14.02.2013, giving all the required information. Scanned copy of the said letter filed under an acknowledged date stamp before the ld. Assessing Officer in the course of these assessment proceedings for AY 2010-11 is extracted below for ready reference:
4.4. 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. Bona Sera Hospitality Pvt. Ltd. AY 2014-15 Assessing Officer and were duly submitted by the assessee. All these documentary evidences are placed on record in the paper book. Further, these three years were subjected to scrutiny assessment u/s. 143(3) for which the relevant assessment orders are placed on record. On the three assessments, there is nothing mentioned in the orders about any discrepancy or deficiency or adverse view taken by the assessee in respect of the stated loan transaction between the promoter Director Dr. Francis Pinto and the assessee.
4.5. 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, Bona Sera Hospitality Pvt. Ltd. AY 2014-15 premium charged by the assessee is very excessive and is not in comparison with the fair market value. ii. Ld. Assessing Officer observed that assessee has not complied with certain conditions specified under the Companies Act, 1956 which requires filing of form No. PAS-3 to the Ministry of Company Affairs before/on issue of share at premium. The said form was filed only on 25.10.2016 which does not justify charging of such a huge share premium. iii. Assessee had submitted a valuation report from a Chartered Accountant in respect of issue of shares at premium which followed the discounted cash flow method for the purpose of valuation. The valuation so arrived at per share in the valuation report is at Rs. 4,042.53 per share against which assessee has issued the shares at a premium of Rs.4,090.40. In this respect, ld. Assessing Officer for testing the credibility of the valuation of shares verified the projected figures with the actual results to discard the valuation arrived at by the assessee. iv. Ld. Assessing Officer also observed that pass book of the Director was not submitted to establish the proof of advancing of loans in the year 2011.
5.1. Ld. Assessing Officer thus, concluded that assessee has written off its loan liability of earlier years by way of issue of shares at exorbitant premium which is nothing but a sham transaction. According to him, assessee had pumped its ill gotten money by way of loan from two of its Directors and converted this unaccounted into share capital and premium. According to him, this is a colourable devise adopted by assessee to evade tax on artificially created premium value for issuing shares. He thus, treated the additional share premium amount of 5.2. 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. In my view, converting a loan provided by a director or promoter of a company into shares, along with share premium, due to poor business conditions is a legitimate financial restructuring strategy and should not be considered a sham transaction. The decision to convert a loan into equity is often driven by the need to address financial challenges faced by the company and to strengthen its Bona Sera Hospitality Pvt. Ltd. AY 2014-15 capital Structure. In challenging business conditions, companies may experience liquidity issues and find it difficult to service existing loans. Converting loans into shares and share premium can be a strategic move to improve the financial position of the company. It allows the company to enhance its equity base, reduce debt levels, and potentially improve its creditworthiness. Assessee has sufficiently explained the conversion of loan into shares, along with share premium with the help of evidences. As long as the transaction is conducted transparently and in compliance with regulations, it should be viewed as a genuine and legitimate financial restructuring effort rather than a sham transaction. Considering the same and the evidences submitted, the ground taken by assessee is allowed.”
5.3. 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 Bona Sera Hospitality Pvt. Ltd. AY 2014-15 to bring to tax the income element on conversion of the well accepted and assessed loan liability into share capital with premium in the year under consideration. We are intrigued, since the conversion still remains a transaction forming part of the balance sheet of the assessee on the same side i.e., instead of now reported as loan liability, it is reported as share capital with premium. Had such a conversion not taken place, would the loan liability be a sham transaction in the year under consideration, is a question we ask ourselves. Upon pondering, the answer is clear no. Before us, ld. Sr. DR made reference to section 56(2)(viib) which brings to tax excess consideration over fair market value on issue of shares by closely held companies. We perused the said section to note that it would apply in a case where the recipient closely held company receives from any person being a resident which in the present case is not the fact. In the case before us, Dr. Francis Pinto is the resident of UK, as noted above. Further, “being a resident” in the said section is omitted by the Finance Act, 2023 w.e.f. 01.04.2024. Thus, the contention of the ld. Sr. DR fails. Considering the above stated facts and discussions, we are in agreement with the observations and findings of the ld. CIT(A) and do not find any reason to interfere with the same. Accordingly, ground No.1 and 2 raised by the Revenue are dismissed.
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 Bona Sera Hospitality Pvt. Ltd. AY 2014-15 explanation to 14A has held to be prospective. Thus, in the given set of fact where ld. CIT(A) has restricted the disallowance to the extent of exempt income earned during the year of Rs.15,000/- and granting relief for the balance, we do not find any reason to interfere with the finding so arrived at by the ld. CIT(A). Ground No.3 and 4 raised by the Revenue are dismissed.
In the result, appeal of the Revenue is dismissed.
Order is pronounced in the open court on 30 September, 2025