ESSAR TELEHOLDING LTD,MUMBAI vs. ACIT-6(2)(2), MUMBAI

आदेश / O R D E R PER M. BALAGANESH (A.M):

2236/Mum/2018 M/s. Essar Technologies Ltd in a short term capital loss of Rs 69,36,00,000/-. The assessee was asked to furnish the basis of valuation for cost price and selling price . The assessee furnished the vauation report for the selling price whereby fair value of CCD of Rs 85/- has been denoted at Rs 61.88 by taking 15% for illiquid nature of CCD. The ld AO observed that CCD has been purchased from a related party on 31.3.2011 and sold within a short span of 7 months with a loss of around 30% and it looks very unusual and in the background of huge capital gains incurred during the year, it looks like a colorable device to offset the huge capital gains with capital loss. The ld AO further observed that CCDs of M/s Imperial Consultants & Sec. Pvt Ltd has been sold to M/s Kroner Investment Ltd, which is the holding company and this transaction is hit by provisions of section 47(v) of the Act and so it cannot be treated as transfer. Therefore the short term capital loss of Rs 69.36 crores was disallowed by the ld AO u/s 47(v) of the Act as well as being a colorable device to defraud the revenue.

Kroner Investment Ltd., Sold 3Cr.CCD’s at Rs.61.88 on 16.10.2011 98.33% holding

Assessee Sold 3Cr.CCD’s at Rs.85 on 31.03.2011 100% holding Sold 3Cr.CCD’s at Rs.85 on 29.03.2011 100% holding

3cr.CCD’s issued Essar Holdings Ltd in F.Y.08-09 at (Subsequently ETHL Communications Holdings Ltd., Rs.100 merged with imperial Fresh 3Cr. CCD’s issued consultants and Securities Ltd.,) by Imperial Consultants and Securities Ltd. on 29.03.2011 upon merger at Rs.85

2236/Mum/2018 M/s. Essar Technologies Ltd a) From the flow chart, it could be seen that 3 crores CCDs were issued in Financial Year 2008-09 at Rs 100 per debenture to M/s ETHL Communications Holdings Ltd. Pursuant to merger of Essar Holdings Ltd with Imperial Consultants and Securities Ltd (ICSL in short) , fresh 3 crores CCDs were issued by Imperial Consultants and Securities Ltd to ETHL Communications Holdings Ltd on 29.3.2011 upon merger at Rs 85 per debenture. This issue price of Rs 85 per debenture was based on an independent valuation report furnished by an expert which was also subject matter of adjudication by the Hon’ble High Court while finalizing / approving the scheme of merger. In other words, this issue price of Rs 85 per debenture was approved by Hon’ble High Court in the scheme of merger. The revenue has also not disputed this portion of price of Rs 85. b) The 100% shares of ETHL Communications Holdings Ltd were held by Essar Telecommunications Pvt Ltd. Accordingly, ETHL Communications Holdings Ltd sold 3 Crores CCDs to Essar Telecommunications Pvt Ltd on 29.3.2011 at Rs 85 per debenture. c) The 100% shares of Essar Telecommunications Pvt Ltd were held by the assessee. Accordingly, Essar Telecommunications Holdings Ltd sold 3 Crores CCDs to the assessee herein on 31.3.2011 at Rs 85 per debenture.

2236/Mum/2018 M/s. Essar Technologies Ltd d) The assessee in turn sold 3 Crores CCDs on 16.10.2011 at Rs 61.88 to Kroner Investment Ltd, which was holding only 99.83% shareholding in assessee company. e) Hence the purchase price of 3 Crores CCDs for the assessee from Essar Telcommunications Holdings Pvt Ltd was Rs 85 per debenture on 31.3.2011. The assessee sold these CCDs to Kroner Investment Ltd (holding company of assessee) on 16.10.2011 at Rs 61.88 per debenture. This transaction resulted in a loss of Rs 69.36 crores to the assessee and assessee claimed the same as short term capital loss as the debentures were held by the assessee for a period of less than one year from the date of its purchase.

On the aspect of colorable device 6.1. The assessee submitted that the sale price of the debenture at Rs 61.88 was determined based on the valuation report of an independent chartered accountant, who valued the debentures at Rs 61.88 per debenture after applying discount of 15% on the value of CCD while determining the fair market value of debentures , since ICSL is not a listed company and CCDs of that company are not traded in the open market. This was done by the independent valuer by taking shelter from the prevailing practice of applying discount upto 20% in the value of 2236/Mum/2018 M/s. Essar Technologies Ltd investments on account of illiquid nature which is allowed for the purpose of valuation of unlisted shares under the provisions of the Wealth tax Act. We find that the assessee had placed reliance on this independent valuation report of a chartered accountant to assail the argument of the ld AO that the entire purchase and sale transactions of CCDs as a colorable device. The entire documentation called for by the ld CITA were duly filed before him such as a) Details of investments in CCDs of ICSL. b) Certified true copy of Board Resolution dated 17.1.2011 giving consent to the company to invest its funds in securities of ICSL. c) Certified true copy of Board Resolution dated 13.10.2011 for sale of investments in CCDs of ICSL to Kroner Investments Ltd at a mutually agreed price between the parties. d) Certified true copy of Board Resolution dated 29.3.2011 for allotment of debentures and terms and conditions of issue of CCDs when they were issued by ICSL . e) Justification for applying 15% discount provided in valuation report for illiquid nature of assets.

We find that no flaws were found by the ld CITA on the aforesaid documents called for by him.

2236/Mum/2018 M/s. Essar Technologies Ltd 6.2. The independent chartered accountant based on the assets and liabilities of ICSL as per the balance sheet as on 31.3.2011, determined the value of CCDs at Rs 72.80 per debenture and later a discount of 15% was applied on the same on account of illiquid nature of CCD to arrive at the fair market vlaeu of CCD at Rs 61.88 per debenture. Hence it could be seen that the sale price of CCDs at Rs 61.88 per debenture to a related concern is duly supported by an independent valuation report of a chartered accountant which was having strong basis and rationale. Moreover, from the Balance Sheet of ICSL as on 31.3.2012, we find that there is a loss of Rs 894.81 crores and this loss was there throughout the period 1.4.2011 to 31.3.2012 in view of the fact that the major portion of the loss was contributed by finance cost which is a period cost. Hence the loss for the relevant period i.e 1.4.2011 to 16.10.2011 (being the date of sale) should also be considered by the valuer while determining the fair market value. The ld AR had placed on record the broken period loss at Rs 23.02 per debenture which is worked out as under:-

(A) Loss during the year Rs 894.81 crores (B) Number of equity shares (after dilution –as per Vauation report) 210.28 crores (C ) Loss per equity share (A) / (B) 4.25 per share (D) Loss per debenture (multiply by 10) 42.50 per debenture (E) Pro rata loss till 16.10.2011 23.02 per debenture (F) Revised Valuation ( 85-23.02) 61.98 per debenture 6.3. We find that, in any case, the revenue authorities had only disputed the reduction of 15% discount from the fair market value arrived at Rs

2236/Mum/2018 M/s. Essar Technologies Ltd 72.80 per debenture based on the balance sheet as on 31.3.2011 by an independent chartered accountant to arrive at final value of Rs 61.88 per debenture (being the sale price of debentures). We find that the revenue had not disputed the determination of fair market value of Rs 72.80 per debenture as it is based on the audited balance sheet of ICSL as on 31.3.2011. Hence applying the broken period loss for the period upto the date of sale of debentures (i.e 16.10.2011) of Rs 23.02 per debenture and reducing the same from the value determined by the independent chartered accountant as on 31.3.2011 of Rs 72.80 per debenture, the revised fair market value per debenture would be Rs 49.78 ( 72.80 – 23.02). The assessee had sold the debentures at Rs 61.88 per debenture which is higher than the revised fair market value of Rs 49.78 per debenture. Hence it cannot be said the transactions had been carried out by the assessee as a colorable device.

6.4. We find that the assessee had purchased the 3 crores CCDs at Rs 85 per debenture from its subsidiary company Essar Telecommunications Holdings Pvt Ltd. From the aforesaid flow chart , it is evident that the said subsidiary company had also purchased at the very same rate of Rs 85 per debenture from its subsidiary company (which is a step down subsidiary of the assessee company) i.e ETHL Communications Holdings Ltd. That step down subsidiary was originally holding 3 crores CCDs from Financial Year 2008-09 which were issued to it at the rate of Rs 100

2236/Mum/2018 M/s. Essar Technologies Ltd per debenture, but pursuant to merger of Essar Holdings Ltd with ICSL and pursuant to the order of the Hon’ble High Courts, the said step down subsidiary was issued fresh 3 crores CCDs by ICSL on 29.3.2011 at the rate of Rs 85 per debenture. Hence effectively the purchase price (i.e cost price) of Rs 85 per debenture was made by the assessee to ensure that its subsidiary company and step down subsidiary company does not incur any loss on their investments and it is for commercial reasons. Hence the purchase price of Rs 85 per debenture cannot be construed as a colorable device.

6.5. We find that one of the main objections of ld CITA was that the independent valuer had not applied the same discount rate of 15% on the purchase price of Rs 85 per debenture in view of the fact that the transactions are with related concerns, despite the fact that valuation report was also given by the very same valuer. In this regard, it would be pertinent to note that the issue price of RS 85 per debenture had been approved by the Hon’ble High Courts in the scheme of merger of Essar Holdings Ltd with ICSL and the CCDs were issued to the respective holding companies at the very same rate of Rs 85 per debenture as could be evident from the flow chart reproduced hereinabove. We find that the assessee had already adduced reason for purchasing the CCDs at the very same rate of Rs 85 per debenture in order to ensure that the subsidiary and step down subsidiary should not incur any loss on the said 2236/Mum/2018 M/s. Essar Technologies Ltd transaction. This explanation , in our considered opinion, is very reasonable in the totality of the facts and circumstances. With regard to this objection raised by the ld CITA that the assessee by having transactions with its related concerns, had pre-arranged the transaction in such a way to incur short term capital loss , we find that the ld AR rightly placed reliance on the decision of Hon’ble Jurisdictional High Court in the case of CIT vs Pitty Bros. Private Ltd reported in 120 ITR 709 (Bom) wherein the operative portion of the said judgement is reproduced as under:- 6. Mr. Joshi took us through the close connection between the assessee- company and the tobacco company as also between the firm which has sold the shares to the assessee- company and the managing agents of the tobacco company and submitted that these facts conclusively establish that the transaction was not a normal purchase of share but one to control the tobacco company or to keep the management and control of the tobacco company in the hands of Pittie & Co. with which the assessee-company and its shareholders were closely connected. If this argument were to be accepted, it would mean that in almost every case of purchase of shares of a private limited company or a closely held company it would have to be held that the purchase was not on trading account but for different considerations. This may be one of the factors which were required to be considered but cannot by itself be a decisive factor as contended for by Mr. Joshi. Further, it would appear to us that the conclusion reached by the Tribunal that the price paid was not an inflated or a dictated one or an arranged one is correct, particularly when it is realised that the latest available balance- sheet was the one as on 31st March, 1953 which gave the break-up value of the shares of the tobacco company of Rs. 99.77. In retrospect after the lapse of many years it may be possible to say that the break-up value was only Rs. 50 or Rs. 60 at the time of the purchase of the shares. This, however, will not be a fair method of ascertaining the price to be paid at the time of purchase.

7. Merely because the assessee-company and its vendor firm are sister concerns or are having common directors and partners would not necessarily make the purchase an arrangement or a device to palm off the shares of the tobacco company at an inflated price. The Tribunal has in its well considered order dealt with the various aspects which influenced the Income-tax Officer and the Appellate Assistant Commissioner and has 2236/Mum/2018 M/s. Essar Technologies Ltd dealt with the same in paragraph 5 of its appellate order. We are in substantial agreement with the approach of the Tribunal. Having stated this, it would follow that we see no reason to interfere with the conclusion arrived at by the Tribunal from the facts found; and if that be our view, then the question referred to us is required to be answered in the affirmative and in favour of the assessee. The question is accordingly so answered.

6.5.1. Yet another decision was also relied upon by the ld AR on this issue rendered by the Hon’ble Jurisdictional High Court in the case of CIT vs Mehta (P) Ltd reported in 220 CTR 148 (Bom) wherein the operative portion is as under:- 5. As regards the contention of the revenue that the three concerns/ companies were under the control and management of the same group of persons and, therefore, warranted application of principles initiated in McDowel & Co. Ltd.'s case (supra), we are of the view that such a contention in the absence of any material in support thereof should be outright rejected. It is argued by the assessee before all the authorities that the said three companies are independent and acted as such at arm's length. In fact, SCCIL is a listed company. This contention of the assessee is accepted by CIT(A) who has reached a finding of fact that the amounts received by Maharana Mills from the Banks and financial institutions and from SCCIL were utilised in purchasing new machinery which was also installed and it is not the allegation of the Assessing Officer that these funds were misappropriated by the directors or were frittered away. CIT(A) have, therefore, reached a finding of fact that the guarantee given by Agrima was genuine. This finding of fact is also accepted by the Appellate Tribunal. In view of these concurrent findings of fact, we see no reason as to why we should interfere with the said finding of fact.

6. In view thereof we are of the view that except for making a bare allegation that the entire exercise of giving guarantee by Agrima to SCCIL was collusive and only to book losses on the ground that the companies have common directors and were under the same management, the revenue has failed to produce any material in support of their case that the guarantee given by Agrima was not genuine. Only because some directors were common one cannot

2236/Mum/2018 M/s. Essar Technologies Ltd reach to a serious conclusion that the entire transaction was collusive and colourable only to book losses. 7. In view of the above we answer the above question raised in the appeal against the revenue and in favour of the assessee. The appeal stands dismissed with no order as to costs.

6.6. We find that the ld CITA had also observed that the huge capital gains had arose to the assessee on 18.10.2011 whereas it had incurred capital loss on sale of CCDs to related concern on 16.10.2011. Since the dates coincide to a nearer date, the entire transactions of sale of CCDs to related concern resulted in a loss is a pre-arranged transaction. In this regard, we hold that both the transactions had been carried out independently. The assessee had earned huge long term capital gains on sale of certain shares in the open market on 18.10.2011. In any case, we find that the sale of CCDs had resulted in a loss and that had happened on 16.10.2011. There is no dispute by the revenue with regard to the date of carrying out of these transactions as they are also otherwise governed by respective legal provisions and procedures as per the Companies Act, 1956. The sale of shares resulting in long term capital gain had happened subsequent to the sale of CCDs resulting in loss and hence the same cannot be viewed with a jaundiced eye, merely because the loss had arose out of transactions with a related concern and the same being carried out by coinciding to a nearer date. We hold that it is for the assessee to decide when to sell the CCDs and similarly when to sell the equity shares and the revenue cannot step into the shoes of the assessee in this regard. In this regard, we find that the ld AR rightly placed reliance on the decision of Hon’ble Delhi High Court in the case of CIT vs Gillette Diversified Operations P Ltd reported in 324 ITR 226 (Del) wherein the facts of that case and the operative portion are reproduced as under:-

2236/Mum/2018 M/s. Essar Technologies Ltd 3. The assessee had also purchased shares of GDOPL on April 4, 1996 for a consideration of Rs. 8,40,83,094 and had sold those shares to Gillette Group India Private Limited (GGIPL) on December 30, 1999 for a sale consideration of Rs. 8,36,64,770, thereby resulting in loss of Rs. 4,18,324. However, due to application of cost index, the capital loss on sale of these shares worked out to Rs. 2,35,76,735. The Assessing Officer noticed that the assessee-company had outstanding liability of Rs. 19.77 crores, used for purchase of shares of group companies. He concluded that the transactions were entered into on the same date merely to create capital loss and was a colourable device for tax avoidance.

4. The Assessing Officer disallowed the capital loss on sale of shares on the ground that these shares were purchased from the funds made available by the group companies and observing that the assessee- company had entered into these transactions on the same day only to create capital loss of investment held by it. …………………..

9. The Income-tax Appellate Tribunal being the final fact finding authority, we cannot interfere with the finding recorded by it unless it is shown to be perverse. The appellant has failed to show any perversity in the finding recorded by the Income-tax Appellate Tribunal. No substantial question of law, therefore, arises for our consideration. The appeal is, accordingly, dismissed.

6.7. We find that the assessee could sell the CCDs of ICSL at Rs 61.88 per debenture due to losses incurred by ICSL. When there is a loss in an investee company, the same would get automatically reflected in the shares or debentures held by an outsider or a related concern when the said investments are sold. Obviously, the loss of ICSL had contributed to the loss to assessee on sale of CCDs to Kroner Investments Ltd. 6.8. We would also like to place reliance on the decision of the Co- ordinate Bench of Kolkata Tribunal in the case of ITO vs PKS Holdings reported in (2016) 71 taxmann.com 345 dated 1.6.2016 wherein the facts of that case and operative portion are reproduced as under:- 6. The AO noticed that on 27.11.2006 the assessee sold its land and earned few crores of rupees as Profit on Sale. Immediately on receipt of the money i.e. 29/11/06 and 30/11/2006, the entire amount of sale proceed were transferred to partner or to their related concern. From 27/02/2007, the assessee started the transaction with Shilpa Stock Broker Pvt. Ltd. which ultimately led to the Derivatives Loss. The AO noticed the following peculiar features of the transactions in Derivatives which lead to the loss in question:— (1) The transaction of F&O started on 27/02/07 and ended on 31/03/07

2236/Mum/2018 M/s. Essar Technologies Ltd which resulted in entire loss. (2) Each & every F&O transaction entered in these 30 days was purchased on the same day & sold on the same day. (3) Each and every transaction resulted in loss. (4) Margin requirement as per SEBI to be paid to Stock Broker was not followed and there rules were violated. (5) Losses were in the odd figures, however the assessee paid the broker in round figures as per ledger copy submitted by the assessee. (6) The Broker Ledger which was from 11/1/2000 to 15/04/2009 and for the entire period of 9 years it is seen that assessee has entered into the transactions only on 27/02/2007 to 31/03/2007. (7) No. return of the Assessee was filed for Ass. Year 2008-09 & Ass. Year 2009-10.

7. The AO was of the view that from the above facts it was apparent that loss on Derivatives was an arranged affair, the transaction defy normal human behavior and human probability. This is because the assessee continues to enter loss in each and every transaction and still continued to transaction F&O and increased its loss. Such transactions stopped immediately after the end of Ass. Year 2007-08 because assess thereafter was not in need of any further Loss even prior to or post AY 2007-08. In the circumstances, the AO was of the view that the loss was a make belief affair arranged in manner to manufacture loss and thus the same being a sham transaction which lead to a bogus loss. ……………………..

2236/Mum/2018 M/s. Essar Technologies Ltd agreement/arrangement it is not possible to rewrite the agreement/arrangement. The right of the parties to enter into transactions according to their free will and choice has always been protected, the only rider being that both the professed intention and the real intention should be the same. Any transaction in which the professed intention and the intention gathered from the documentation are the same must be considered to be genuine. In the present case the AO disallowed the set off of loss in question not on the basis of any incriminating documents or bringing any adverse evidence on record, but with the observation that the transactions failed to satisfy the test of human probability and the objectives of the transactions was tax evasion. The AO did not doubt the genuineness of the transactions carried out by the Assessee which resulted in the loss. Even in the remand report filed before CIT(A), the AO accepted the veracity of the documents filed by the Assessee in support of the loss but has ignored the loss only on the ground the transactions were colourable and sham device to avoid tax payable on profit on sale of land. This conclusion in the light of the decision of the Hon'ble Supreme Court in the case of Vodafone International Holdings B.V. (supra) cannot be sustained. Consequently, the CIT(A) was fully justified in deleting the addition made by the AO and directing the loss to be allowed to be set off as claimed by the Assessee. We find no grounds to interfere with the order of the CIT(A). Accordingly, this ground of appeal of the revenue is dismissed.

6.8.1. We find that the documentary evidences for the purchase and sale of CCDs were not doubted by the revenue. We find that the transactions of purchase of CCDs from related concern and sale of CCDs to related concerns are also not doubted by the revenue. Only the pricing is doubted by the revenue on the ground that it was carried out with related concerns and it had resulted in a loss. The professed intention and the real intention of the assessee is proved in the instant case in the various documents filed before the lower authorities. If the same are to be treated as different, then the onus is on the revenue to prove it, which in the instant case, in our considered opinion, has not been proved by the revenue. The ld AR also made an oral submission that purchase

2236/Mum/2018 M/s. Essar Technologies Ltd transactions are not disbelieved for other assessees in the same flowchart and that the same is disbelieved only for the assessee herein.

6.9. We find that the ld CITA had reproduced the entire computation of total income of the assessee under the head ‘income from business’ and ‘ income from capital gains’. From the said details with regard to ‘income from capital gains’, we find that the assessee had derived net long term capital gains on sale of equity shares and preference shares of Rs 1007.40 crores. Out of this huge long term capital gains of Rs 1007.40 crores, a meager amount of short term capital loss of Rs 69.36 crores was sought to be set off by the assessee on sale of CCDs of ICSL. Even after this set off, there was substantial net taxable long term capital gains left with the assessee to the tune of Rs 938.04 crores. This was however sought to be adjusted with the brought forward long term and short term capital losses of the assessee from the earlier years, which is totally different altogether and even after this set off of brought forward losses, there is substantial amount of long term and short term capital losses of earlier years available with the assessee which were also carried forward to subsequent years. We also find that even if the impugned short term capital loss of Rs 69.36 crores on sale of CCDs of ICSL to related concern is not available to the assessee , then also the net long term capital gains of Rs 1007.40 crores would be set off with the brought forward long term and short term capital losses from earlier years. No arguments were 2236/Mum/2018 M/s. Essar Technologies Ltd advanced by the ld DR before us to rebut these facts with regard to the availability of brought forward capital losses of earlier years. In these circumstances, it could be safely concluded that there is absolutely no intention on the part of the assessee to evade tax by booking bogus short term capital loss on sale of CCDs to related concern. Hence the transactions carried out by the assessee cannot be construed as a colorable device.

6.10. With regard to the observation made in point no. 5 of para 38 of the ld CITA’s order in respect of non-availability of brought forward losses from earlier years, we find that the appellate orders for earlier years were passed subsequent to carrying out of the transactions of purchase and sale of CCDs by the assessee, wherein the losses were allegedly converted into nil or into income. We hold that on the date of transaction of sale of CCDs by the assessee, there cannot be any colorable device or a malign intent to evade tax on the part of the assessee as these appellate orders for earlier years were passed subsequent to entering of impugned transactions of sale of CCDs by the assessee herein.

6.11. In view of the aforesaid findings in the facts and circumstances of the case, we hold that the transactions carried out by the assessee in respect of sale of CCDs to related concern which had resulted in a short term capital loss of Rs 69.36 crores is to be construed as a genuine loss

2236/Mum/2018 M/s. Essar Technologies Ltd and cannot be construed as a colorable device. Accordingly, the grounds raised by the assessee in this regard are allowed.

8. Let us now take up revenue appeal in ITA No. 2236/Mum/2018. The only issue involved is with regard to deletion of disallowance u/s 14A of the Act made by the ld CITA.

8.1. We have heard the rival submissions. We find that the ld CITA had granted relief to the assessee on the ground that there is no exempt income claimed by the assessee during the year under consideration and also on the ground that there were no expenses that were debited in the profit and loss account which were claimed as deduction in the return of income. The ld CITA had given a categorical finding that no deduction of expenses has been claimed by the assessee and hence there is no question of disallowance of expenses u/s 14A of the Act. These factual findings were not controverted by the ld DR before us. We also find that the Hon’ble Supreme Court in assessee’s own case reported in 401 ITR 445 (SC) had held that disallowance u/s 14A of the Act cannot be made when there is no exempt income claimed by the assessee. Respectfully following the same, we do not find any infirmity in the order of the ld CITA. Accordingly, the grounds raised by the revenue are dismissed.

2236/Mum/2018 M/s. Essar Technologies Ltd