JP MORGAN FUNDS ,MUMBAI vs. DCIT (IT) 3(1)(1), MUMBAI

ITA No. 2430/Mum/2019 Assessment Year: 2015-16 Page 1 of 5 INCOME TAX APPELLATE TRIBUNAL MUMBAI ‘I’ BENCH, MUMBAI [Coram: Pramod Kumar (Vice President) And Sandeep S Karhail (Judicial Member)] ITA No. 2430/Mum/2019 Assessment Year: 2015-16 JP Morgan Funds ....………………. Appellant C/o SRBC & Associates LLP, 14th Floor, The Ruby, 29- Senapathi Bapat Marg, Dadar (W) Mumbai 400028 [PAN: AABCJ4972E] Vs. Deputy Commissioner of Income Tax (IT) 3(1)(1) Mumbai. ……………………..Respondent Appearances: Rajan R. Vora along with Hemen Chandariya for the appellant Milind Chavan for the respondent Date of concluding the hearing : 29.03.2022 Date of pronouncement : 24.06.2022 O R D E R Per Pramod Kumar, VP: 1. By way of this appeal, the assessee-appellant has challenged the correctness of the order dated 11th January 2019, passed by the learned CIT(A) in the matter of assessment u/s. 143(3) of the Income Tax Act, 1961 for the assessment year 2015-16.

ITA No. 2430/Mum/2019 Assessment Year: 2015-16 Page 2 of 5 on which dividend Distribution Tax had been discharged] as ‘Nil’ while computing the capital gains arising on the sale of these debentures, instead of treating the cost of acquisition as the amount of dividend, which was, issued in the form of bonus debentures. The Appellant craves leave to add, alter, vary, omit, substitute or amend any or of the above grounds of appeal, at any time before or at the time of the appeal, so as to enable the Hon’ble Income Tax Appellate Tribunal to decide this appeal according to law. 3. The assessee before us is a non-resident company, engaged in the business as a foreign portfolio investor. The assessee was also a shareholder in Blue Dart Express Ltd. During the course of scrutiny assessment proceedings, it was noticed that the assessee was allotted 1,38,558 debentures of Blue Dart Express Ltd. in respect of which has claimed cost of acquisition of Rs. 13,85,580/-. When the assessee was asked to justify this cost of acquisition, it was explained by the assessee that the consideration for acquiring these debentures was dividend of Rs. 13,85,580/-. The Assessing Officer, however, declined this claim. Aggrieved, assessee carried the matter in appeal before the learned CIT(A) but without any success. The learned CIT(A) confirmed the stand of the Assessing Officer, and, in a rather cryptic order, concluded as follows:- From the perusal of assessment order it is seen that the Assessing officer has without prejudice to the addition made has stated that, if the amount of Rs. 13,85,580/- is allowed to the assessee as exempt income of the current assessment year at any stage of appeal, then the cost of acquisition of these debentures should be treated as Nil while computing the capital gains on sale of these debentures as and when such transactions happens. I have gone through the appellant's submission. I find that appellant's submission are not tenable. The Assessing Officer has rightly stated that cost of acquisition of these debenture should be taken as NIL because these are bonus debenture and appellant has not incurred any cost for its acquisition. Hence this ground of appeal is dismissed. 4. The assessee is not satisfied and is in further appeal before us. 5. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position. 6. We have noticed that the assessee had made specific submissions explaining the cost of acquisition of the debentures of BDEL but none of the authorities below has dealt with these contentions by way of a speaking order. These contentions have been simply brushed aside and dealt with in a summary manner. The assessee’s submission before the learned CIT(A), for example, and as noted by learned CIT(A) himself at pages 3 and 4 of the impugned order, were as follows:- 2.1 The learned AO has rejected the appellants contention of treating the amount of dividend received on BDEL as cost of acquisition at the time of computing the capital gains on sale of these debentures.

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2.2 Since the dividend amount was reinvested and issued in the form of bonus debentures, it actually represented the cost of acquisition of these debentures. Accordingly, the face value of the debentures, i.e. the amount of dividend subject to DDT i.e. IN 13,85,580, had been considered as the cost of acquisition of the bonus debentures allotted to the Appellant, for the purpose of computing capital gains on the sale of these debentures. Where the dividend amount is not deducted as cost of acquisition the same will lead to taxation of the same income (i.e. dividend) twice i.e. once as dividend and then as capital gains. In this connection, reliance is placed on a decision of the Supreme Court in the case of Commissioner of Income-tax v Narasimhan (236 ITR 327) [copy enclosed as Annexure 21. In the said case the share capital of the company was reduced by a scheme of capital reduction and the difference between the face values was paid to the shareholders. The Supreme Court held that as per section 2(22)(d) of the Act, the payment which represented accumulated profits should be regarded as dividend and taxed accordingly. The balance amounts (representing the pro-rata distribution of assets) should be treated as a capital receipt. It further held that in order to compute capital gains, if any, in the hands of the shareholder, the portion attributable towards accumulated profits (dividend) should not be considered and the balance amount, if any should be taken into account while computing capital gains, if any. 2.3 Given the above ruling, since the bonus debentures allotted by BDEL is regarded as 'deemed dividend' and taxed accordingly, it should be excluded while computing capital gains, if any, at the time of sale of such debentures. Further, unless the amount considered for the purpose of DDT is reduced from the capital gain earned on the sale of such debentures, the same will lead to taxation of the same income twice i.e. once as dividend and then as capital gains, which could never have been the intention of the legislature. However, the learned AO has rejected the claim of the Appellant and held that where the amount of dividend was allowed to the Appellant as exempt income at any stage of appeal, the cost of acquisition of the debentures received from BDEL should be treated as ‘Nil’ while computing the capital gains on the sale of these debentures. 2.5 In view of the above, the Appellant submits that dividend amount subjected to DDT i.e. INR 13,85,580 should be considered as the cost of acquisition of the bonus debentures for the purposes of computing capital gains. 7. Yet, the learned CIT(A) has not even dealt with issues so raised by the assessee. If he had cared to look at the relevant facts, his conclusions could not have been the same. These debentures were allotted to the assessee in consideration of the dividend, which was received by a merchant banker on his behalf and reinvested by the merchant banker in debentures issued by the BDEL. The nature of this transaction is aptly described in the notes to accounts of Blue Dart Express Ltd- a copy of which is placed before us at page 82 of the paper book. The relevant note is as follows:- During the year, in terms of the Scheme of Arrangement ("the Scheme") between the Company and its Members, duly approved by the Hon'ble Bombay High Court on September 19, 2014, the Company delivered an amount of Rs. 33,219 Lacs being the amount equal to the aggregate value of the Debentures to a merchant banker appointed by the Board on behalf of and as agent and

ITA No. 2430/Mum/2019 Assessment Year: 2015-16 Page 4 of 5 trustee of the Members as deemed dividend within the meaning of the term under Section 2(22)(b) of the Income tax Act, 1961 ("the Act”) and also discharged its liability thereon under section 115-O of the Act. The Merchant Banker immediately following receipt of funds pursuant to the above, paid to the Company, for and on behalf of and as trustee of the Members entitled to Debentures, as and by way of subscription for allotment of requisite number of Debentures. The said payment for and on behalf of the Members by the Merchant Banker has been appropriated/considered to be a payment by the Members entitled to the Debentures under this Scheme towards the cost of acquisition of the Debentures under the Scheme. Thus, the cost of acquisition of Debenture at the hands of the Members is face value i.e., Rs 10/- (Rupees Ten only) each. Upon receipt by the Company of the payment from the Merchant Banker for and on behalf of the Members towards subscription of Debentures of the Company, the Company has issued and allotted to the Members as on the Record Date (November 18, 2014) the appropriate number of Debentures to which the concerned Member is entitled by virtue of his/her/its holding in the Company on the Record Date in the stipulated ratio as per the Scheme. The said Debentures are listed on the BSE Limited and National Stock Exchange Limited. Accordingly, the Company has accrued and paid interest on the said Debentures for the period from November 21, 2014 to March 31, 2015 aggregating to Rs. 1,117 Lacs. 8. Quite clearly, an amount of Rs. 13,85,580/- was indeed received on behalf of the assessee and this amount has been reinvested in the debentures. The debentures were not ‘bonus’ debentures and the nomenclature given by the Assessing Officer is thus incorrect. The taxes were duly paid on the deemed dividend in question, and it did constitute income of the assessee, even though received by a merchant banker on behalf of the assesse. The scheme under which the amount is received by the merchant banker, on behalf of the shareholders-including the assessee, and reinvested on behalf of these shareholders, is duly approved by the Hon’ble High Court, vide order dated 19th September 2014. The fact of, and bonafides of, the transaction cannot thus be disputed. The amount of Rs. 13,85,580/- so reinvested, out of dividend, was the consideration paid for debentures. In the light of these discussions, as also bearing in mind entirety of the case, we uphold the plea of the assessee that the Assessing Officer erred in declines the claim of the assessee with respect to cost of acquisition of Rs. 13,85,580/- in respect of these debentures. The assessee, therefore, must get the relief accordingly. We order so. In the result, the appeal is allowed. Pronounced in the open court today on the 24th day of 9. June 2022. Sd/- Sd/- Sandeep S Karhail Pramod Kumar (Judicial Member) (Vice President) Mumbai, dated the 24th day of June 2022.

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Copies to: (1) The Applicant (2) The respondent (3) CIT (4) CIT(A) (5) DR (6) Guard File By order True Copy Assistant Registrar Income Tax Appellate Tribunal Mumbai benches, Mumbai