ACIT CIR 6(3)2, MUMBAI vs. KHYATI REALTORS P.LTD, MUMBAI

आदेश / O R D E R PER M. BALAGANESH (A.M): This appeal in A.Y.2012-13 arises out of the order by the ld. Commissioner of Income Tax (Appeals)-12, Mumbai in appeal No.CIT(A)-12/DCIT-6(3)(2)/151/15-16 dated 23/01/2017 (ld. CIT(A) in short) against the order of assessment passed u/s.143(3)of the Income Tax Act, 1961 (hereinafter referred to as Act) dated 27/03/2015 by the ld. Dy. Commissioner of Income Tax 6(3)(2), Mumbai (hereinafter referred to as ld. AO).

M/s. Khyati Realtors Pvt. Ltd.,

Family Investments Ltd – 91 shares sold at Rs 13000 per share for Rs 11,83,000/- Vision Finstock Ltd – 304 shares sold at Rs 13000 per share for Rs 39,52,000/-

M/s. Khyati Realtors Pvt. Ltd., Virtuous Finance Ltd – 526 shares sold at Rs 13000 per share for Rs 68,38,000/- Viditi Investments Ltd – 91 shares sold at Rs 13000 per share for Rs 11,83,000/- 3.1. Hence the total sale consideration received by the assessee is as under:- Sale of rights to Alfa Infrprop P Ltd (1012 * 919000) 93,00,28,000 Sale of shares with rights to Mr Sudhir Valia (1 * 932000) 9,32,000 Sale of shares without rights to a) Family Investments Ltd (91 * 13000) 11,83,000 b) Vision Finstock Ltd (304 * 13000) 39,52,000 c) Virtuous Finance Ltd (526 * 13000) 68,38,000 d) Viditi Investments Ltd (91 * 13000) 11,83,000 ------------------ 94,41,16,000 ========= Out of these, Rs 28 crores was paid to the assessee during the year and hence the balance sum of Rs 65,00,28,000/- was shown by the assessee in its balance sheet as on 31.3.2012 as ‘Receivable towards sale of rights’ in Schedule 10 under the head ‘other non-current assets’.

3.2. Since the purchase consideration of shares with rights for the assessee was also Rs 94,41,16,000/-, the assessee reported Nil capital gains on sale of shares with rights in respect of these transactions.

3.3. The ld AO observed that the details of shareholders / directors of the entities involved shows that all parties are of the same promoters group with common address / shareholders as under:-

M/s. Khyati Realtors Pvt. Ltd.,

% hoi din S.N Name of the Shareholders Directors 9 company o. 38.94% 1 Aditya Thermal Family Investment P Ltd Sudhir Valia Dilip Shantilal Energy P Ltd Sanghvi 38.94% Tejasklran Pharmachem India P Ltd Vision Finstock Ltd 10.26% 2 100% Khyati Realtors P Lakshdeep Investment and Nilesh Gandhi Raksh a Valia Ltd Finance P Ltd 3 100% Family Investment Group concerns of Paras B Mehta Milind V P Ltd Mr.Sudhir Valia Goradia

4 Tejasklran 100% Chanra kant Milind V Group concerns of Mr.Sudhir Valia Pharmachem India K Agraw Goradia P Ltd al 5 Vision 100% Paresh Parekh Khyati Valia Suraksha Realty Ltd & others Finstock Ltd 6 100% Dineshk umar Ashok I Bhuta Virtuous Finance Group concerns of PLtd Mr.Sudhir Valia Desai 7 100% Vidifi Investment Group concerns of Sunil R Milind V Mr.Sudhir Valia PLtd Ajmera Goradia 3.4. The ld AO observed that all the parties, the original seller – Aditya Thermal ; the company whose shares are subject matter of transfer – Alfa Infrprop P Ltd ; the assessee company and the buyers of shares of Alfa Infrprop P Ltd from the assessee company , all belong to the same group with common directors and / or address.

M/s. Khyati Realtors Pvt. Ltd., 3.5. The ld AO observed that without payment being made in full, the shares were purportedly received from Aditya Thermal. Similarly without payment being received in full from Alfa Infrprop P ltd for parting with so called rights etc, the shares of Alfa Infrprop P Ltd were purportedly transferred by the assessee company to other parties.

3.6. The ld AO observed that pursuant to the aforesaid transactions, effectively, a sum of Rs 94 crores was paid from the books of Alfa Infrprop P Ltd to the ultimate benefit of original promoters which is being shown as intangible assets in the books of Aditya as on 31.3.2011. The effective rights of shareholders of Alfa Infrprop P Ltd remains unchanged since the said licenses etc if any, continues to be the property of Alfa Infrprop P Ltd. 3.7. The ld AO observed that the definition of ‘shares’ carried the following rights and a limited liability :- a) Right to participate in the profits of the company . b) Right to participate in the surplus of the company at the time of winding up. c) Liability to pay to the company over and above the paid up capital on the event of deficit which is limited to the extent of unpaid share capital on the shares held by them.

3.8. The ld AO further observed that the rights, duties and liabilities of all shareholders are clearly defined at the time of issue of the shares. Once the rights of shareholders are fixed, they cannot be altered unless the provisions of the Companies Act for this purpose are complied with. He observed that it is incomprehensible as to how as a shareholder of Alfa Infrprop P Ltd, the assessee company, without parting with the share per

M/s. Khyati Realtors Pvt. Ltd., se, can alienate any right or asset of Alfa Infrprop P Ltd, more so when such asset was not even reflected in the Balance Sheet of Alfa Infrprop P Ltd, and transfer it in favour of Alfa Infrprop P Ltd itself. The licenses etc were purportedly in the name of Alfa Infrprop P Ltd and the ownership, if any, over such rights vests with Alfa Infrprop P Ltd in its own right as a separate legal entity. The assesee company, even as a shareholder has no separate right or exclusive right over each and every such asset of the company, whether tangible or not. The whole chain of events smacks of a dubious arrangement with a view to evade taxes on the payment of Rs 93.09 crores received by the assessee company from Alfa Infrprop P Ltd. It is nothing but a colorable device to evade taxes on the sum received by the assessee company. Accordingly, the ld AO stated that the onus is on the assessee company to prove the cash credits found in its books in the sum of Rs 93.09 crores which is found credited in the books of the assessee company as amount received / receivable on sale of rights. There are no such alienable rights legally available to the assessee company. Hence the very nature of receipt stands unproved. Based on these observations, the ld AO added the sum of Rs 93,09,47,000/- as unexplained cash credit u/s 68 of the Act in the assessment.

M/s. Khyati Realtors Pvt. Ltd.,

M/s. Khyati Realtors Pvt. Ltd., be considered that the transactions are non-genuine. The onus is heavily on the department to prove with the help of evidence that the transaction is non-genuine. He submitted that in the present case, the ld AO had not brought anything on record to prove that the transaction is non-genuine or any benefit has arisen to the assessee as a result of the said transaction.

6.1. The ld. DR also filed written submissions from the ld. AO wherein the ld. AO apart from reiterating what has been stated in the assessment order had also pointed out the following facts:-

“In the above transactions, assessee company along with associated entities promoters and directors have created a maze of transactions where an intangible asset has been created to merely transfer of funds to the promoters. This has been highlighted during the assessment proceedings too. Assessee during the course of assessment proceedings has failed to prove the genuineness of the transaction of intangible asset created. The valuation and subsequent transfer are not Justified by the assessee though the onus is squarely on assessee.

M/s. Khyati Realtors Pvt. Ltd., of group company. It is pertinent to note that there was whistle blower complaint against the director Sudhir Valia and group companies for insider trading , siphoning of funds in Sun Pharma group of companies which is available in public domain. This background may be considered while deciding on the merits of the case.

“7.2 I have carefully perused the assessment order and the submission of the appellant. It is found that the AO has made the addition u/s 68 of the Act, The appellant has proved the identity, creditworthiness of the party

M/s. Khyati Realtors Pvt. Ltd., from whom the said amount of Rs 93,09,47,000/- was received. It is found that the AO has not treated the transaction of sale of shares of Alfa Infraprop P Ltd and detachment of certain right being clearances/ licenses/ permits and all intangible assets associated with coal based thermal power project of up to 2640MW capacity to be set up as per the term of article 5A and 5B of Articles of Association of Alfa as genuine transaction. The main contention of the AO is that there cannot be any right entailing a proportionate right in respect of each asset of the company and shareholder cannot enter into a contract by itself. The AO held this transaction as a dubious arrangement with a view to evade taxes on payment of Rs 93.09 cr received by the appellant company from Alfa. It is found that the AO has not explained in what way the appellant has evaded taxes. As per the appellant it was just the transaction of purchase of sale of shares of Alfa and certain rights attached to such share. The appellant further claimed that as per Income Tax Act. It is proved that there can be certain rights attached to the shares which the AO failed to appreciates. The appellant has given the reference of section 27 and section 269UA of the Income Tax Act and claimed that it was evident from these sections that the there could be certain specific rights to the shareholders of the company. It is held that the AO has raised the technical issue, but has not demonstrated as to how the transactions involved leads to the evasion of tax. If the appellant has not detached the certain rights of the shareholders and only shares were transferred then there was no objection of the AO. It is pertinent to question as to whether only the detachment of certain rights of shareholder from its shares leads one to the view that the transaction is dubious. The question that arises is that such a transaction does not show that it is a dubious transaction since there is no effect of the sale transaction even though there is a transaction of purchases of shares of Alfa by the appellant. The money is not lying with the appellant. The sale consideration received from the Alfa has to be transferred against the liability which arose on account of purchase of shares and since there was nothing left with the appellant hence there was no gain to the appellant. Then, it is strange as to how the A.O. is holding the view that the receipt claimed as sale consideration is falling within the ambit of 'income'. Therefore, in the light of the discussion above since there is no 'income' arising to the appellant/ the issue of addition u/s. 68 does not arise. The addition of Rs. 93,09,47,000/- u/s, 68 is deleted. Ground no. 2 is allowed.”

8.1. We find that the ld CITA had observed above that it is pertinent to question as to whether only the detachment of certain rights of shareholder from its shares leads one to the view that the transaction is M/s. Khyati Realtors Pvt. Ltd., dubious. In this regard, we find that there would be no difference in the sale consideration as far as the assessee is concerned as to whether it is on account of sale of rights or sale of shares. There may not be any impact in the hands of the assessee. But it would have drastic impact in the hands of the purchaser of rights i.e Alfa Infrprop P Ltd wherein this circular transaction had enabled them to capitalize the intangibles in the form of licenses / permits etc in its books and claim depreciation thereon , which is explained in detail hereinbelow under the heading ‘colourable device’. We have gone through the financials of Alfa Infrprop P Ltd from Asst Years 2012-13 to 2015-16 which were placed on record by the ld AR at the instance of the Bench as stated hereinabove. From the same, the following things emerge :- a) Alfa Infrprop P Ltd charged depreciation of Rs 3,06,065/- in Asst Year 2012-13 and capitalized the same to capital work in progress as the project had not commenced during that year. Hence there is no question of claiming any deduction / allowance / benefit in the return of income by Alfa Infrprop P Ltd. b) Alfa Infrprop P Ltd charged depreciation of Rs 3,72,37,880/- in Asst Year 2013-14 and capitalized the same to capital work in progress as the project had not commenced during that year. The ld AO in the scrutiny proceedings u/s 143(3) of the Act dated 30.3.2016 disapproved the capitalization of the said depreciation of Rs 3,72,37,880/- to the capital work in progress. The ld AO in the said assessment order had categorically observed that the assessee had not claimed any depreciation u/s 32 of the act as the business of the assessee had not yet commenced. However, subsequent year, pursuant to the commencement of business, the assessee shall claim the depreciation on such approval / agreement

M/s. Khyati Realtors Pvt. Ltd., with the shareholders even u/s 32 of the Act. The said agreement with the sharesholders for giving up the rights shall not fall under definition of intangible assets as the right has to be commercial in nature, further the same should be of similar nature of know-how, patents, copyrights, trademarks, licenses, franchises. In the assessee’s case, the approval of giving the rights in the assets of the company by the shareholders cannot be treated as intangible assets as per the definition u/s 32 of the Act does not fall in any categories of the nature mentioned in the section. Thus, the depreciation u/s 32 which in case claimed by the assessee in subsequent year shall not be allowed. Further the said expenses shall be just regarded as capital expenses which be even not be allowed u/s 37(1) of the IT Act. c) Alfa Infrprop P Ltd charged depreciation of Rs 1,75,73,296/- in Asst Year 2014-15 and capitalized to capital work in progress. A sum of Rs 1,96,64,584/- was charged as depreciation to the profit and loss account by Alfa Infrprop P Ltd ( i.e book depreciation) which was duly added back in the computation of income. Hence the total book depreciation for the year ended 31.3.2014 was Rs 3,72,37,880/-. We find from the computation of income for Asst Year 2014-15, Alfa Infrprop P Ltd had added back the book depreciation charged to profit and loss account in the sum of Rs 1,96,64,584/- and did not claim income tax depreciation on the same. But it is pertinent to note that Alfa Infrprop P Ltd had retained a sum of Rs 6,00,66,631/- towards Depreciation and included the same under the head ‘Expenditure during Construction Period’ as on 31.3.2014. d) The assessee charged depreciation of Rs 3,57,55,819/- in Asst Year 2015-16 and debited to profit and loss account ( i.e book depreciation) which was duly added back in the computation of income by that M/s. Khyati Realtors Pvt. Ltd., assessee. We find from the computation of income for Asst Year 2015- 16, the assessee had added back the book depreciation charged to profit and loss account in the sum of Rs 3,57,55,819/- and did not claim income tax depreciation on the same. But it is pertinent to note that Alfa Infrprop P Ltd had retained a sum of Rs 6,03,01,900/- towards Depreciation and included the same under the head ‘Expenditure during Construction Period’ as on 31.3.2015.

8.2. We find that the submissions of the ld. DR on the aspect of colourable devise and treating the transaction as sham by lifting the corporate viel had been addressed by us hereinbelow separately. With regard to the submission made in para 12 of the written submissions of the ld. AO in his written submission regarding the whistle blower complaint against the director Sudhir Valia and group companies for insider trading, siphoning of funds in Sun Pharma Group of companies etc., we are not inclined to give any opinion on the same as those facts does not emanate from the facts available on record before us.

8.3. We hold that the assessee had duly proved the nature and source of credit in the form of sale proceeds of shares and rights and hence no addition could be made in the hands of the assessee u/s 68 of the Act. Even the identity of the parties, creditworthiness of the parties and genuineness of transactions with regard to receipt of sale proceeds of shares are proved in the instant case. Hence the three necessary ingredients of section 68 of the Act have been duly proved by the assessee in the instant case and hence no addition u/s 68 of the Act could be made in the hands of the assessee. But the most excruciating fact is that this circular transaction had enabled the other party i.e Alfa Infrprop

M/s. Khyati Realtors Pvt. Ltd., P Ltd and the original promoters of shares of such company to benefit substantially which is explained below. This is where the role of the assessee would be vital as without its assistance, the circular transactions could not have been carried out so as to enable ultimate benefits to the interested parties as detailed below.

8.4. On Colourable device By doing this circular transaction, the following things emerge :- a) The original promoters of Alfa Infrprop P Ltd could capitalize on the intangibles of Alfa Infrprop P Ltd ( in the form of various licences and approvals) by selling their shares with the rights attached thereon to the assessee herein (i.e Khyati Realtors Pvt Ltd) at a hefty price of Rs 94.41 crores. b) Alfa Infrprop P Ltd by again purchasing the intangibles ( ie licences ) alone from the assessee for Rs 93,09,28,000/- was able to capitalize those intangibles in its books and claim depreciation thereon (details of the same are stated hereinabove). In this regard, the argument of the ld AR that Alfa Infrprop P Ltd had also not claimed any depreciation on these intangibles would not hold good as the depreciation amount is included as part of the ‘Expenditure during construction period’ and Alfa Infrprop P Ltd would be obviously claiming depreciation on the total capitalized cost in the year of completion of their project. Hence the allowance of depreciation on intangibles would get showered on Alfa Infrprop P Ltd which emanated out of the arrangement entered into in earlier years with the conduit of the assessee herein. Hence the transactions had to be seen in totality from its origin till the end.

M/s. Khyati Realtors Pvt. Ltd., 8.4.1. Apparently , there may not be any profit or income arising in anybody’s hands, but pursuant to the aforesaid arrangement, the above two parties were benefitted i.e (a) the promoters while selling the shares at a hefty price and (b) Alfa Infrprop P Ltd claiming depreciation on intangibles. Hence the entire transactions were carried out to enable the original promoters of Alfa Infrprop P Ltd to sell the shares in Alfa at a hefty price and to enable Alfa Infrprop P Ltd to claim depreciation on its intangibles in later years , thereby proving the colorable device. The Hon’ble Supreme Court in the case of CIT vs Sri Meenakshi Mills Ltd reported in 63 ITR 609 (SC) had held that at times it would be necessary to lift the corporate veil and pierce through the transaction to understand the underlying intention of the parties to the arrangement entered into. The relevant observation of the Hon’ble Apex Court in this regard are as under:- “It is well-established that in a matter of this description the income-tax authorities are entitled to pierce the veil of corporate entity and to look at the reality of the transaction. It is true that from the juristic point of view the company is a legal personality entirely distinct from its members and the company is capable of enjoying rights and being subjected to duties which are not the same as those enjoyed or borne by its members. But in certain exceptional cases the Court is entitled to lift the veil of corporate entity and to pay regard to the economic realities behind the legal façade. For example, the Court has power to disregard the corporate entity if it is used for tax evasion or to circumvent tax obligations”.

The aforesaid observation of Hon’ble Apex Court would be squarely applicable to the arrangement of circular transactions carried out by the assessee herein.

8.4.2. Be that as it may, the nature and source of credit of sale proceeds of shares had been duly proved in the case of the assessee and hence no addition could be made u/s 68 of the Act. But it cannot be brushed aside

M/s. Khyati Realtors Pvt. Ltd., that the assessee had also acted as a conduit in the entire arrangement by allowing the aforesaid two benefits to be conferred on the above two parties.

8.5. In view of the aforesaid observations, we hold that the addition has been rightly deleted u/s 68 of the Act in the hands of the assessee herein. But we hold that the assessee had indeed acted as a conduit for entering into an arrangement which is actually a colourable device as detailed hereinabove. With these observations, we dismiss the grounds raised by the revenue.

Order pronounced in the open court on this 26/07/2019