PR. COMMISSIONER OF INCOME TAX-1 vs. AZALEA INFRASTRUCTURE PVT. LTD.
What did the High Court hold?
The High Court upheld the ITAT's decision, finding no ground to entertain the appeal. The Court noted that the assessee, Azalea Infrastructure Pvt. Ltd., had suffered a loss of INR 108.75 crores due to the forfeiture of share warrants but had never claimed a Short Term Capital Loss set-off. Crucially, the Court observed that the transaction was subsumed within a Scheme of Merger sanctioned by the appropriate High Court. Therefore, the amount in question could not have been taxed in the hands of the respondent-assessee. The Court acknowledged the ITAT's observation that although the entire transaction appeared to be a sham, it could not form the subject matter of further inquiry or determination under the Income Tax Act, 1961, in the hands of the assessee, given the merger and the fact that the loss was not claimed. The appeal was dismissed.
What were the facts?
The appellant, Pr. Commissioner of Income Tax-1, challenged an order dated January 28, 2021, by the Income Tax Appellate Tribunal (ITAT). The ITAT had rejected the Department's appeal concerning Short Term Capital Loss arising from the forfeiture of share warrants of India Bulls Infrastructure Ltd. The assessee, Azalea Infrastructure Pvt. Ltd., was allotted 15 crore warrants of India Bulls Power Ltd. convertible into equity shares. The assessee paid 25% of the warrant price, amounting to ₹108.75 crores. Subsequently, a High Court order sanctioned a scheme of arrangement involving India Bulls Infrastructure and Power Ltd. and other companies. The scheme stipulated that warrant holders were liable to pay 1% of the balance amount. The ITAT noted that the transaction appeared to be a scheme for transferring funds without tax consequences, with the assessee being one of the layers. The assessee incurred a loss of ₹108.75 crores on forfeiture of warrants but did not claim it as a set-off. The ITAT observed that the transaction was subsumed in a merger scheme and could not be taxed in the assessee's hands.
What were the issues?
1. Whether the ITAT erred in rejecting the Department's appeal concerning the Short Term Capital Loss arising from the forfeiture of share warrants, despite the transaction appearing to be a sham and a scheme for transferring funds without tax consequences. Assessee's Contentions: The assessee contended that the issue was covered by several decisions in its favour and relied on the decision of the learned CIT-A. The assessee also submitted that the transaction was subsumed in a Scheme of Merger sanctioned by the High Court, and therefore, the amount in question could not be taxed in its hands. The assessee argued that the real beneficiary was India Bulls Power Ltd., which underwent restructuring and amalgamation, and the assessee was merely a conduit. Revenue's Contentions: The revenue argued that the ITAT should have considered the transaction as a sham and a scheme for transferring funds without tax consequences, as indicated by the layering of funds and the involvement of group companies. The revenue sought to tax the loss arising from the forfeiture of share warrants.
Which sections of the Income-tax Act were involved?
Section 192A, Section 391, Section 394
AI-generated summary — verify with the full judgment below
$~23 * IN THE HIGH COURT OF DELHI AT NEW DELHI + ITA 136/2022
PR. COMMISSIONER OF INCOME TAX-1 ..... Appellant
Through: Mr. Sanjay Kumar, Ms. Easha
and Ms. Hemlata Rawat, Advs.
for Revenue.
versus
AZALEA INFRASTRUCTURE PVT. LTD. ..... Respondent
Through: Mr. Gautam Jain, Mr. Ajit
Kumar Jha & Mr. Piyush
Kumar Kamal, Advs.
CORAM:
HON'BLE MR. JUSTICE YASHWANT VARMA
HON'BLE MR. JUSTICE PURUSHAINDRA KUMAR KAURAV
O R D E R %
04.03.2024 1. The Commissioner impugns the order dated 28 January 2021 passed by the Income Tax Appellate Tribunal ["ITAT"] and insofar as it has proceeded to reject the appeal of the Department which had raised the issue of Short Term Capital Loss originating from the forfeiture of share warrants of India Bulls Infrastructure Ltd. 2. We note that the ITAT has on a consideration of facts as they obtained observed as follows:- “8. We have carefully considered the rival contention and perused the orders of the lower authorities. We have also considered the various judicial precedents cited by the learned CIT - A and relied upon by the learned authorised representative as well as the judicial precedents relied upon by the 'learned assessing officer for making the above addition. The facts clearly shows that on October 20, 2010, India Bulls Power Ltd pursuant to the provisions of Section 192A of the Companies Act, 1956 made a preferential allotment of 42 crore as fully convertible warrants to 4 different companies which are the entities promoted by the promoters of India bulls real estate Ltd, which upon conversion would entitle them to acquire an equivalent number of equity shares of the company of the face value This is a digitally signed order. The authenticity of the order can be re-verified from Delhi High Court Order Portal by scanning the QR code shown above. The Order is downloaded from the DHC Server on 07/03/2024 at 11:36:27
of ₹10 each to conversion price of ₹29 per equity shares. Consequent to that 15 crore warrants of the India bulls Power Ltd convertible into 15 crore equity shares of the India Bulls Power Ltd of face value of ₹10 each at the option of the warrant holder, assessee company, was allotted. The warrants were issued and allotted to the assessee on payment of 25% of the warrant price that is Rs 108.75 crores. Thus, a balance amount of ₹ 326.25 crores was further payable by the assessee company for the full value of the warrant. Subsequently, as per the order of the Honourable High Court on 17/10/2011 u/s 391 - 394 of The Companies Act 1956 along with three other companies, one of them being the India bulls infrastructure and Power Ltd which invested in a company where from the money is rooted for investment in India bulls Power Ltd, sanction was granted by the Honourable High Court. The scheme was so framed by the companies that the warrant issued by India Bulls Power limited would be converted into partly paid shares of the company and the holder was liable to pay 1 % of the balance amount within two days from the effective date of scheme i.e. by 27/11/11. Naturally, the promoters of India Bulls group promote all the companies who applied for the warrant of the assessee. Therefore, at the time of framing of the scheme, it was within their knowledge that the companies who have applied for warrant, has initially for payment of 25% of the warrant price has borrowed money from its holding company which in turn borrowed from another company and that another company also borrowed fund from India bulls infrastructure and Power Ltd which is one of the company involved in the scheme. Therefore, it is apparent that the whole scheme was created for transferring a sum of ₹ 304.50 crores in the name of India bulls Power Ltd by transferring it from another company without any tax consequence. The assessee is one of the layers used by the India bulls group for doing this. However as the case of the assessee is concerned it has incurred that loss on forfeiture of the share warrant to the extent of 25% amounting to ₹ 108.75 crores which was never claimed by the assessee or set of against any other income. Therefore, the appellant company was created only for the reason of transferring money from the group concern to the assessee company and subsequently to another group company, booking loss in the assessee company. The assessee company is used as one of the layer for the above transaction. Therefore, the remedy for the whole transaction does not lie under The Income Tax Act but under some other law. The ground [I] stated by the learned assessing officer clearly shows the scheme of the things wherein a sum of ₹ 108.75 crores or originated from India bulls infrastructure and Power Ltd against issue of 15 crore warrants of India bulls Power Ltd, all group companies, forfeiting a sum of ₹ 304.50 crores by transferring through layers of conduit companies, clearly shows the scheme of things. During the course of hearing, on looking at the strange set of facts, the information was called This is a digitally signed order. The authenticity of the order can be re-verified from Delhi High Court Order Portal by scanning the QR code shown above. The Order is downloaded from the DHC Server on 07/03/2024 at 11:36:27
from the assessee with respect to the corporate restructuring and business justification for layering of the funds. Assessee merely submitted that the issue is squarely covered in favour of the assessee by several decisions and once again relying on the decision of the learned CIT - A. As far as the scheme of things goes, it is evident for everybody. Nothing is further required to be mentioned that who is the beneficiary and who is the conduit. Further, it is not the assessee who is to be taxed in its hands, as the real beneficiary is India bulls Power Ltd. which further went into restructuring and scheme of amalgamations."
As is manifest from the above, the respondent / assessee although having suffered a loss of INR 108.75 crores, had never sought a Short Term Capital Loss set off consequent to forfeiture of the share warrants. In any case, the transaction came to be subsumed in the Scheme of Merger which came to be sanctioned by the appropriate High Court. In that view of the matter, the amount in question could not have even been taxed in the hands of the respondent / assessee. 4. It is the aforesaid facts which has constrained the ITAT to observe that although the entire transaction appeared to be a sham, the same could not form subject matter of further inquiry or determination under the Income Tax Act, 1961 ["Act"]. 5. In view of the aforesaid, we find no ground to entertain the appeal. The same fails and shall stand dismissed.
YASHWANT VARMA, J.
PURUSHAINDRA KUMAR KAURAV, J. MARCH 4, 2024/MJ
This is a digitally signed order. The authenticity of the order can be re-verified from Delhi High Court Order Portal by scanning the QR code shown above. The Order is downloaded from the DHC Server on 07/03/2024 at 11:36:27
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