CIT vs. S NET FREIGHT INDIA PVT LTD

Admit.

With consent we have heard counsel for the parties. We have considered the materials on record.

The assessee carries on air freight, ocean freight and land transport business and transport related activities. The assessee inter alia claimed set-off of losses of the assessment years 2001-02 and 2002-03 in the returns filed for the assessment year 2012:DHC:4847-DB

The ITAT accepted the assessee’s contentions and held that Dr. Prem Chand John and Mrs. Dakshayani Reddy were in fact holding the shares on behalf of foreign investors and the foreign investors fell within the description of “beneficial owner” under Section 79 of the Act. The reasoning of the Tribunal is to be found in the following extract of the impugned order: 2012:DHC:4847-DB

The case of the assessee is that the investment by foreign companies is not permissible in the absence of approval from FIPB. It was for such a purpose that a JV agreement was entered into between M/s. S-Net Freight (India)P.Ltd., and G.A. GOSS (S)Pvt. Ltd., both Singapore incorporated companies carrying on business in the field of freight and logistics, to set up a private limited company in India, as a subsidiary of M/s. S-Net Freight (India)P.Ltd. The company was incorporated through Indian nominees of the two companies, through whom the shares were held beneficially during assessment year 2001- 02. In the subsequent year, the two companies themselves became shareholders, on getting the requisite approvals from FIPB. The shareholding pattern for assessment years 2001-02 and 2002-03 is given at page 17 of the Assessee‟s Paper Book („APB‟ for short), as submitted before both the Taxing Authorities, as follows:-

In the submissions before the ld. CIT(A) (APB 10 to 13), the issue was explained before the CIT(A), stating, inter alia, that the Foreign Exchange Management Act , provides Rules for foreign investment in India; that as per FEMA Rules, these are sectorial caps in which Automatic Route is not available and for which specific approval of Foreign Investment Promotion Board is required. In the instant case, the process started from 05.06.2000 and ended on 20.11.2001, i.e., F.Y. 2001-02 relevant to assessment year 2002-03; that the company had allotted shares to 2012:DHC:4847-DB

These contentions of the assessee have nowhere been refuted by the ld. CIT(A) and he has only observed that it could not be accepted that the nominees were used only as a legal necessity. Now, once, the requirements of the provisions were FEMA the facts are to be stringently followed and it has been so done, it was the requirement of the Foreign Direct Investment Laws which made the assessee to act in the manner discussed above. The provisions of section 79 of the I.T. Act, therefore, cannot be said to envisage the transfer of shares by the subscribers of the Memorandum of Articles of Association as a change in the shareholding of the assessee company. The provisions of FEMA have not been shown to be non-mandatory. In order to carry on business in India, foreign company need must abide by the provisions of the said Act. Moreover, the two shareholders indeed acted only as the nominees to enable the smooth passage of the other shareholder in the subsequent year. Therefore, we do not find ourselves at one with the observations made by the ld. CIT(A) in this regard. The contention of the assessee is, therefore, accepted, particularly keeping in view the observations in “Swadeshi Match Co.” (supra), wherein it was held that “holding” within the meaning of Explanation II of para D of Part II of the First Schedule I of the Finance (No.2) Act, 1962 had not been defined and, therefore, it was possible to construe that the beneficial shareholding was included in it and vis-à-vis, that however, when a provision under consideration is a provision for giving enhanced benefit by way of additional rebate to the assessee and both constructions are possible, then it is discernable to adopt the construction which will benefit the assessee; and that therefore, for the purpose of Explanation II, both legal ownership and beneficial ownership should be taken into account.

The revenue contends that the deletion of requirement of finding that the transfer of shareholding was not bona fide leads to a presumption of transfer and consequently the losses cannot be carried forward by virtue of Section 79 of the Income Tax Act. Ld. counsel contended that in addition the mere circumstance that the assessee had to seek approvals for the foreign investors to carry on business in this case cannot be a consideration since parliament has through the second proviso to Section 79 visualized certain situation pursuant to business arrangements, for company’s restructure. It was contended on behalf of the assessee that there was no error of law and the ITAT was justified in deducing that the shareholding pattern which existed prior to 31.3.2002, was in favour of the foreign investors who infused capital by contributing `49.9 lakhs. It was emphasized that the Tribunal took note of the provisions of FEMA and also materials appearing on the record and that no question of law arises.

This Court has considered the reasoning of the Assessing Officer as well as the CIT(Appeals). Elaborate contentions were made by the assessee, apparently; reliance was placed on various materials on the record. However, this Court does not discern any reasoning by either of those officials or even the ITAT to conclude that at the time of original incorporation (within the assessment year 2000-01) on 16.8.2000, the arrangement between the shareholders (Dr. Prem Chand John Mrs. Dakshayani Reddy) on the one hand and real owner i.e. foreign investor companies, was always that the former were to facilitate the process awaiting approval. While such conclusion is permissible in law, lack of any discussion in the present case by the lower authorities should have led the Tribunal to either examine or remand the matter for reconsideration. As appears from a reading of the Tribunal’s order and FEMA order, at the time of incorporation, the share capital was `2,000/-. The foreign investors infused `49.90 lakhs during the subsequent assessment year which was treated as share application money and later appropriated as share capital after 2012:DHC:4847-DB

In the light of above discussion, this Court is of the opinion that matter has to be remitted to the Assessing Officer for reconsideration of the entire record and returning findings with specific reference to the arrangement, if any, which existed between original shareholders of the company and the foreign investors. The appeal is accordingly allowed; the Assessing Officer shall issue notice to the respondent/assessee and decide the matter afresh and return findings on this aspect as early as possible, in any event within 4 months from today.