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Before: Shri H.S. Sidhu & Shri L.P. Sahu
per the said Schedule placed at page 61 of the Paper Book (PB), the assets directed to be transferred are listed as under:-
PART III (Description of all Stocks, Shares, Debentures and other charges in action)
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S.No. Particulars Transferee 1 Transferee 2 (Assessee Co.) (Amt. in thousand) (Amt. in thousand) ------- ----------------- -------------------- ---------------------- 1. Fixed Assets a. Buildings (Paintings & Decoration items) -- 680.00 b. General Machinery (WDV) 846.00 543.00 c. Audio Video Equipment (WDV) 814.00 -- d. Computer & Software (WDV) -- 41.00 e. Office Equipment (WDV) -- 41.00 f. Motor Vehicles (WDV) 952.00 965.00 g. Furniture & Fixtures (WDV) 78.00 905.00 Total 2690.00 3175.00
2. Investments 12,55,269.00 14,624.00 3. Current Assets 722,363.00 150,000.00 In lieu of the transfer of assets, as aforesaid, the assessee company was to issue shares in the ratio of 1:6 to the shareholders of CHPL, i.e. UBS, Mauritius. As stated above, the Hon'ble Delhi High Court approved transfer of assets inter alia comprising of investment of Rs. 125,52,68,509 and current assets of Rs. 72,23,63,000 as aforesaid, in lieu of shares in the ratio of 1:6 as stated above.
The Assessing Officer, while examining the Balance Sheet of the assessee company for the year ending 31st March, 2010, observed that the assets so transferred in the scheme of demerger to the assessee company by CHPL, included the investment in Optionally Convertible Debentures (OCD) of a sum of Rs. 200 crores. This was in addition to the investment in equity shares of Rs. 125,52,68,509/- in GSL. According to the Assessing Officer, this transferred
ITA No. 2087/Del./2014 4 amount of OCD of Rs. 200 crores was not a part of the scheme of demerger as per the order of the Hon'ble Delhi High Court.
The assessee contended before the AO that the sum of Rs. 72,23,63,000, represents current assets as per the Schedule reproduced above, containing OCD worth Rs. 72 crores. The assessee company further contended that the remaining amount of Rs. 128 crores, being OCDs, was subscribed by CHPL in GSL and transferred to the assessee company between 01.04.2009 and the date of order of the Delhi High Court i.e. 25.05.2010. The assessee contended that in lieu of the additional amount of OCD transferred of Rs. 128 crores, shares in the ratio of 1:6 were issued by the assessee company to the shareholders of CHPL i.e. UBS, Mauritius. The assessee further contended that the debentures transferred to the assessee company by CHPL were simply a case of shares issued to the shareholders of CHPL against the consideration of Rs. 128 crores by way of debentures.
The Ld. Assessing Officer disagreed with the assessee and did not give credit of Rs. 72 crores of OCD said to be forming a part of Rs. 72,23,63,000 as per the Schedule of Property and proceeded to add the entire Rs. 200 crores being OCD transferred by CHPL to the assessee company in lieu of shares. He held that ITA No. 2087/Del./2014 5 the OCD of Rs. 200 crores are not covered by the order of Hon'ble Delhi High Court and are in contravention thereof and even otherwise, constitutes an income in the hands of the assessee company u/s 2(24) since the said section includes income of all kinds. The Assessing Officer relied on a number of decisions as to the definition of income and proceeded to add a sum of Rs. 200 crores to the returned income of the assessee.
6. Aggrieved by the assessment order, the assessee carried the matter before the ld. CIT(A), who after considering the detailed submissions of assessee, assessment order and various case laws, deleted the entire addition of Rs. 200 crores. The findings and reasonings of the ld. CIT(A) are summarized as under :
(i) In the Schedule to the order of the High Court, an amount of Rs. 72,23,63,000/- has been shown as current asset. According to the Ld. CIT(A), the Assessing Officer has not examined the details of the same and failed to appreciate that the current assets of Rs. 72,23,63,000 were OCDs. This is evident from the audited Balance Sheet of CHPL and the assessee company wherein these facts are clearly brought out. Thus, out of Rs. 200 crores, Rs. 72,23,63,000/- represents OCDs approved by the Hon'ble Delhi High Court for transfer and it is only the balance amount of Rs. 127.72 crores that has been additionally transferred by the assessee company after 01.04.2009, which is the appointed date.
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(ii) The amount of Rs. 127.72 crores was further invested by CHPL in OCDs of GSL and transferred to the Assessee beyond the appointed date but before the effective date i.e. 25.05.2010. The Ld. CIT(A) relied upon clauses 4.2, 6.11 and 7.1 of the Scheme of Demerger to hold that as per the comprehensive reading of the Scheme of Demerger, it is evident that the Scheme could be further modified between the appointed date and effective date subject to the concurrence of the transferee company, i.e. the assessee company. He held that merely because more investments have been made between the appointed date and effective date, none of the parties to the Scheme of Demerger get adversely effected in any manner by such modification as both GSL and GSHPL are 100% subsidiaries of CHPL and the underlying purpose of the requirement of section 394 of the Companies Act is to protect the interest of shareholders, transferee company and transferor company which in the instant case, does not get jeopardized in any manner.
(iii) It was further held that by transferring the OCDs of Rs. 127.72 crores, the assessee company as consideration, issued shares to CHPL in lieu of the transfer in the ratio of 1:6. The Ld. CIT(A) had examined the copies of the Balance Sheet of CHPL along with the detailed Notes on Account as 31.03.2010 to arrive at the above conclusion.
(iv) The Ld. CIT(A) further held that even if the Scheme of Demerger by the Hon'ble Delhi High Court is ignored, it is a simple case where debentures have been transferred by CHPL to the assessee company against which shares have been issued to it in the ratio of 1:6. Hence, this is a case of issuance of shares against debentures instead of cash. Such a transaction is always on the capital account.
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(v) The Ld. CIT(A) opined that this is perfectly acceptable method of raising share capital of a company and even Schedule-VI of the Companies Act mandates and approves such a transaction which is in the nature of issuance of shares for consideration other than cash.
(vi) The Ld. CIT(A) went a step further to examine the source of investment by CHPL in debentures of Godawari. The finding of fact was that CHPL had sold its shares in ELEL Hotels to Indian Hotels Company Limited and out of the consideration received, it had subscribed to debentures of GSL. Bank statements of CHPL and other supporting records to buttress this fact was examined by Ld. CIT(A) before arriving at the conclusion that source of investment for debentures by CHPL stood established.
7. The Ld. DR vehemently opposed the order of the Ld. CIT(A). He contended that the current assets are defined as cash or cash equivalent and the OCDs cannot be said to be a part of the sum of Rs. 72,23,63,000 as on 31.03.2009. According to him, there were no OCDs as on 31.03.2009 and in the Balance Sheet of CHPL, as on 31.03.2010, they are shown as application money. It was further submitted that the entire investment in the OCD was not out of the sale of investment by CHPL in ELEL Hotels i.e. Hotel Sea-Rock, Mumbai. He stated that the Scheme of Demerger was to hive off the business convention undertaking of CHPL and the balance investment of Rs. 128 crores from 1 April, 2009 to 25 May, 2010 is not linked to the business convention division. He further stated that the debentures
ITA No. 2087/Del./2014 8 transferred partake the character of income in the hands of the assessee company and it is not relevant whether the source of debentures, so transferred, is explained in the hands of the transferor because it is not a question of section 68 of the Act being pressed into service. He further stated that this income could be in the nature of adventure in the nature of trade.
7.2 A written synopsis was also filed by the Ld. CIT (DR), which reads as under :
1.1 As per para 11/page 4 of order of Hon'ble HC dated 25.05.2010(it is separate order the order of same date u/s 394 of companies Act, 1956), the Claridges Hotel Pvt. Ltd. had four business divisions, namely, 1) Luxury Hotel Division, 2) Business Convention Division, 3) Catering Division, and 4) SEZ Division. Out of them last three are demerged as per the scheme of arrangements under consideration. 1.2 The scheme of arrangements under consideration involve three companies, namely, 1) Claridges Hotel Pvt. Ltd. (demerged company), 2) Assessee{ transferee No.l-to whom 'demerged under taking 1' i.e. 'Business convention Division' has been transferred}, and 3) Asian Hospitality Management Pvt. Ltd.{transferee No. 2- to whom 'demerged under taking 2' i.e. 'Catering Division' and 'demerged undertaking 3'i.e. 'SEZ Division' has been transferred}. 1.3 The scheme of arrangements was approved in meetings of Boards of Directors of three companies involved on 02.04.2009, 19.08.2009 and 20.08.2010 {ref. para 4/page 6 of order of Hon'ble HC dated 25.05.2010(it is separate order the order of same date u/s 394 of companies Act, 1956}. 1.4 The Hon'ble High Court of Delhi vide order dated 25.05.2010 sanctioned scheme of arrangements of Claridges Hotels Pvt. Ltd. u/s 394 of Companies Act, 1956( ref. page # 33-62 of PB) w.e.f. 01.04.2009. 2.1 As per "Stage-A" ( ref. page #3 of the order dated 25.05.2010 of the Hon'ble HC/page # 35-PB), property, rights and powers of 'Business Convention Division' of demerged company( Claridges Hotels Pvt. Ltd.) specified in first, second and ITA No. 2087/Del./2014 9 third part of Schedule-II and all other property, right and power of 'Business Convention Division' be transferred to transferee company no. l(assessee). 2.2 As per (part) Schedule forming part of the financial statements for the year ended 31.03.2010 of Claridges Hotels Pvt. Ltd., the amount of Rs. 200 Cr. is shown as 'Debenture application money pending allotment'(ref. page # 81 of PB). Therefore, the Amt. of Rs. 200 Cr which assessee is terming as 'Optionally Convertible Debentures(OCDs)' and consists of two parts, namely, i) Amt. of Rs. 72 Cr. upto from 04.02.2009 to 31.03.2009 and ii) Rs. 128 Cr. between 01.04.2009 to 18.06.2009(ref. para 5.7/page # llof CIT(A)'s order), was simple money advanced to Godavary Shilpkala Ltd. by Claridges Hotels Pvt. Ltd. even upto 31.03.2010. 2.3 As per para 4 of (part) Schedule-20 forming part of the financial statements for the year ended 31.03.2010 of Claridges Hotels Pvt. Ltd. (ref. page # 82 of PB, the controlling stakes in Hotel Sea Rock, Mumbai were sold to Indian Hotel Companies Ltd. through sales of investment (of Claridges Hotels Pvt. Ltd.) in ELEL Hotels and Investments Ltd., Sky Deck Properties and Developers Pvt. Ltd. and Sheena Investments Pvt. Ltd. This sale took place through agreement dated 12.11.2008 which was amended vide 'first' amendment dated 25.06.2009. 2.4 Before CIT(A), as per reply dated 26.12.2013(ref. pg. # 103/PB), the assessee (for the first time) stated that the shares held by Claridges Hotels Pvt. Ltd. in ELEL Hotels and investment Ltd. were sold to Tata group for Rs. 517 Cr. It may be noted that the reply gives the impression as if hotel Sea-rock, Mumbai was sole property of ELEL Hotels and investment Ltd. However, as stated above, note 4 of Schedule 20 forming part of financial statements for FY 2009-10 of CHPL(ref. pg. # 82/PB) clearly shows that it involved two more companies i.e. Sky Deck Properties and Developers Pvt. Ltd. and Sheena Investments Pvt, Ltd. 2.5 As per para 5(iii) at page # 6 of CIT(A)'s order, in FY 2008-09, Rs. 250 Crores were received as part of consideration of sale of Investment effecting sale of Hotel Sea Rock, Mumbai. Out of the said Rs.120 Crores, Rs. 72 Crores were invested in Godavari Shilpkala Ltd. (purportedly by way of OCDs). 2.6 As per para 5(vii) at page # 7 of CIT(A)'s order, 'soon after 01.04.2009 Claridges Hotels Pvt. Ltd. received some more funds towards sale of shares of Sea Rock(as part of consideration of sale of Investment effecting sale of Hotel Sea Rock, Mumbai) and out of those funds, a sum of Rs. 128 Crores further invested during months of April to June 2009 in Godavari Shilpkala Ltd. (purportedly by way of OCDs).
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As per information down loaded from Inernet site www.bricksworkrating.com, on 23.06.2015, M/s Godavari Shilpkala Ltd. was incorporated in 1985 and engaged in the business of Hospitality and Real estate development in Surajkund, Faridabad. It owns two Hotel Properties namely, The Clariges- 5 star hotel(name has changed to 'Vivanta by Taj) and 'Atrium'-3 star hotel. The Company has also developed high end commercial property named 'Pinnacle' with total salable area of 3,18,754 Sq. ft. out of which approx. 90% area is already sold. 2.8 As per clause 5 of the scheme of arrangements(ref. page #45 of PB), in consideration of transfer of the undertaking , the shares of assessee company shall be issued to the shareholders of demerged company in the ratio of 1:6. 2.9 As per clause 6.1, 6.1.1, 6.1.2 and 6.1.3 of the scheme of arrangements (ref. page #46 of PB), there is no provision of crediting balance to 'share premium account'. As per clause 6.1.3 of the scheme of arrangements, excess or deficit shall be credited to General Reserve or debited to goodwill. 2.10 Business has been transferred as on-going concern. It is also stated as per 2(b) of (part) Schedule forming part of the financial statements for the year ended 31.03.2010 of Claridges Hotels Pvt. Ltd.(ref. page #80 of PB). As per scheme sanctioned by the Hon'ble HC, the 'current assets' worth Rs. 7,22,363 thousand are allowed to be transferred ( ref. Schedule of Property- Part-III). The question is whether it covers the application money for Optionally Convertible Debentures(OCD)? The answer is big 'No' because: a) Application money for Optionally Convertible Debentures(OCD) as on 31.03.2009 cannot be current asset because the 'current asset' is defined as, "cash or cash equivalent or any other asset which can be reasonably expected to be converted into cash within one year". It is not investment in a stock listed on any stock exchange. b) There was no so called OCD as on 31.03.2009. In fact, as per B/S of CHPL as on 31.03.2010, these are shown as application money. c) The money was given by CHPL, there is no material to show that it belonged to 'Business Convention Division'. In fact, there is material to show otherwise, e.g.
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(i) it is claim of the assessee itself that the money came from sale of investment in Sea-rock Hotel, Mumbai (and not from profit of 'business convention centre'), and (ii) it is not that all the money received from sale of investment in Sea-rock Hotel, Mumbai was given as application money(it is claim of the assessee itself that it is part of the money which came from sale of investment in Sea-rock Hotel, Mumbai). d) The assessee is trying to cover money paid after 31.03.2009. As per order of Hon'ble HC, the transfer of ongoing concern along with all assets and liability took place on 31.03.2009 and thereafter, it was run by CHPL as trustee. It is not the case of the assessee that transfer of any right to receive the money (receivable against sale of investment in Sea-rock Hotel, Mumbai) is also sanctioned by the Hon'ble HC as part of schedule of Property-Part-III. 4.1 Also, the relevant questions are : i) why CIT(A)'s order in para 4(a) on page 4 says that Hon'ble High Court approved amalgamation of Godavari Shilpkala Ltd. with the assesee company whereas the order of Hon'ble High Court dated 25.05.2010 nowhere says so and above mentioned information on internet shows that Godavari Shilpkala Ltd. is very much existing on 15.06.2015 ? ii) why information about sale of Sea Rock Hotel and its consideration was submitted in guarded manner and in piece meal ? iii) why information about involvement of Sky Deck Properties and Developers Pvt. Ltd. and Sheena Investments Pvt. Ltd. in sale of Sea Rock Hotel, Mumbai and agreement dated 12.11.2008 which was amended vide 'first' amendment dated 25.06.2009 were not mentioned in any of the reply submitted before the AO or CIT(A) ? iv) why 'Debenture application money pending allotment' was referred as investment by way of OCDs). Moot questions are : v) as to whether 'Debenture application money pending allotment' in Godavari Shilpkala Ltd. by Claridges Hotel Pvt. Ltd. can be held as part of 'Business Convention business' done by 'Business Convention undertaking' ? Certainly, it was investment of Claridges Hotels Pvt. Ltd. in Godavari Shilpkala Ltd. as it was made in the said company because it owned two Hotel Properties namely, 'The
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Clariges- 5 star hotel (name has changed to 'Vivanta by Taj') and 'Atrium'-3 star hotel and also developed high end commercial property named 'Pinnacle' with total salable area of 3,18,754 Sq. ft. The decision to invest sale proceeds of sale of investment (of Claridges Hotels Pvt. Ltd.) in ELEL Hotels and Investments Ltd., Sky Deck Properties and Developers Pvt. Ltd. and Sheena Investments Pvt. Ltd. could have been planned near about the date of agreement (i.e. 12.11.2008). vi) The figure of sales proceeds of investment (of Claridges Hotels Pvt. Ltd.) in ELEL Hotels and Investments Ltd., Sky Deck Properties and Developers Pvt. Ltd. and Sheena Investments Pvt. Ltd. is much more than figure of Rs. 200 Crores. Then how come a part of it becomes part of 'Business Convention business' done by 'Business Convention undertaking' ? vii) whether investment of balance 120 Cr. during April to June 2009, is part of 'Business Convention business' held by the Claridges Hotel Pvt. Ltd. in trust as trustee of assessee company ? Obvious answer is 'certainly not' because first of all it is not 'business' and secondly money has not originated from 'business' held in trust after 01.04.2009. The provisions contained in clauses 4 to 4.2 and 7 to 7.3 of scheme of arrangements (ref. page # 44-45, 47-48 of PB) support this contention. viii) as to whether the expression 'including specifically investment in Godavari Shilpkala Ltd.' contained in clause 1.11 of scheme of arrangements(ref. page # 39 of PB) includes 'Debenture application money pending allotment' in Godavari Shilpkala Ltd.? The obvious answer is, 'certainly not' because such investments in form of shares has been specifically mentioned in part-Ill of schedule-II (page # 61 of PB). The residual clauses do not help the cause of the assessee because, it should first come under definition of 'business asset of Business Convention Division'. ix) Whether the said 'Debenture application money pending allotment' can be said to be consideration of shares allotted as consideration of 'demerger of Business Convention Division' ? The obvious answer is, 'certainly not' because it is neither part of scheme of arrangements sanctioned by Hon'ble High Court of Delhi nor it has any relation to 'Business Convention Division'. x) As whether 'current assets' of Rs. 72,23,63,0007- shown in part-Ill of Schedule- II (page #61 of PB) can be construed as 'Optionally Convertible Debentures(OCDs)' or 'Debenture application money pending allotment' ? First of all it is not business asset, secondly, it is not business asset of 'Business
ITA No. 2087/Del./2014 13 Convention Division', thirdly description does not tally, and fourthly the figure also does not tally. xi) The proposition that it is investment of 'Luxury Hotel Division' is more probable as per normal prudence? 5.1 The assessee before the CIT(A) has tried to show the transaction as covered u/s 47 as 'not regarded as transfer'. It is misplaced argument and not relevant as we are not determining incidence of capital gain in the hands of transferor in terms of section 47. We are concerned with whether the transaction has yielded income in the hands of transfree. The answer is a resounding 'yes' because the definition of income u/s 2(24) is wide enough and courts have ruled in favour of Revenue as per the ratios relied upon by the AO. 5.2 It is not relevant as to whether source of this credit is explained in hands of transferor because it is not question of section 68. 5.3 The allotment of share is in consideration of the scheme of demerger sanctioned by the order of Hon'ble HC. Any plea that it is in consideration of something transferred outside the scheme of demerger, is illogical and liable for rejection.
It may be seen from the above that i) partial and incomprehensible information was presented before CIT(A). ii) CIT(A) did not appreciate facts and circumstances and misdirected himself into irrelevant questions. iii) The correct position is that it is receipt to assessee which is formed to carry out business activity and earn income. The apparent is that every receipt to an artificial juridical entity formed for earning profit through business is income. The onus is upon the assessee to show that it is not 'income' of the assessee. The assessee failed to discharge this onus.
Another issue to be deliberated upon is why the holding company UBS pay Rs 200 crore to demerged company, GSHPL, which has a asset of only Rs 30 lakh and a business profit of Rs 1 crore. As a holding company the UBS must have information about the intrinsic value of the assessee which is not being shared by the assessee. The holding company has received 6 shares of the assesse which has miniscule asset and small profit. There is no valuation done of the assessee which would command a consideration of Rs 200 crore. The assessee company has received this amount of Rs 200 crore as income which is in the nature of ITA No. 2087/Del./2014 14
adventure/business in the nature of trade. In this transaction there are all the elements of legal character of trade or business. G. Venkataswami Naidu and Co 35 ITR 594(SC). There is a dominant intention of the assessee to embark on a venture in nature of trade as distinguished from capital investment. Present in the case R. Dalmia 137 ITR 665(Del). The transaction may not be in line of the business of the assessee does not alter the character of the transaction as adventure in the nature of trade. Dalmia Cement Ltd 105 ITR 633(SC). A single/isolated venture are not excluded from the adventure in nature of trade. G. Venkataswami Naidu (supra). In Raja Bahadur Kamakhya Narain Singh 77 ITR 253(SC) it was held that surplus arising on sale of shares would be revenue if it is categorized as adventure in nature of trade.”
On the other hand, the Ld. Counsel of the assessee company vehemently supported the order of Ld. CIT(A). He reiterated the submissions made before the ld. CIT(A) and also filed a written synopsis in a tabulated form, which reads as under :
“Ground no. 1: Whether Ld. CIT(A) was correct on facts and circumstances of the case and in law in deleting the addition of Rs. 200,00,00,000/- made by AO on account of disallowance of debentures transferred in contravention of the directions of the Hon’ble High Court of Delhi?
FACTS: The assessment for A.Y. 2010-11 has been made u/s 143(3) dated vide order dated 28.03.2013 served on the assessee on 3rd April 2013, determining the total income at Rs. 2,04,70,51,350/- as against the income of Rs. 4,70,51,350/- declared in the return filed on 18.09.2010. Demand of Rs. 92,38,46,520 has been raised.
AO’s contentions: The ld. AO has made the impugned addition on the only ground that OCDs worth Rs. 200/- crores were transferred in contravention of the direction of the Hon’ble Delhi High Court.
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ASSESSEE’s CONTENTIONS: Following is the flowchart of demerger scheme:
Universal Business Solution (Mauritius) ↓ 100% Owner of Claridges Hotel Pvt. Ltd. (Indian company)
Invested in Godavari Shilpkala Business convention division Hospitality Ltd. : (Rs. 0.30 crore) 1. Rs. 72 crores in Deb as on 01.04.2009 2. Rs. 128 crores in Deb between 01.04.2009 & May 2010 3. Rs. 125.52 as Equity shares in GSL ↓ Investment of Rs. 325.52 in GSL and Banquet division worth Rs. 0.30 crores transferred to assessee as per demerger scheme approved by Delhi High Court. DEMERGER SCHEME APPROVED BY DELHI HIGH COURT ↓ 1. New company i.e. GSHPL formed after demerger gets following assets from Claridges Hotel Pvt. Ltd.: A. Business convention division with assets & liabilities worth Rs. 0.30 crore; B. Debentures in GSL worth Rs. 200 crores C. 100% equity shares of GSL 125.52 crores Total assets transferred 325.82 crores 2. (i) In lien GSHPL issues its shares in the ratio of 1:6 to shareholder of CHPL which is UBSL Mauritius (ii) As a consequence GSPL becomes a wholly owned subsidiary of UBSL (Mauritius) and its balance sheet after acquisition is Liabilities (in crores) Assets (in crores) Share Capital (UBSL, Mauritius) 0.48 Deb in GSL 200 General Reserves 325.34 Equity shares in GSL 125.52
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Assets of Business Division 0.30 Total 325.82 Total 325.82
I. Transfer of OCDs worth Rs. 200 crores was made as per the order ASSESSEE’s Contentions: and direction of the Hon’ble Delhi Court dated 25.05.2010: 1. The brief facts of the case are being stated herein under which will establish the claim of the assessee that the addition made is not tenable on facts and in law: a) UBSL Mauritius is Mauritian company which owns 100% shares of Claridges Hotels Pvt. Ltd., a company incorporated and registered in India. b) Claridges Hotels Pvt. Ltd. sold shares of ELEL Hotels Pvt. Ltd., a company having Hotel Sea Rock as its asset, to Indian Hotels Company Limited (IHCL) of the TATA group in the year 2009. c) During financial year 2008-09, Claridges Hotel invested Rs. 72 cores in Optionally Covertible Debentures of Godavari Shilpkala Ltd. d) Claridges Hotels Pvt. Ltd. decided to demerge its Business Convention and approached the Hon’ble High Court of Delhi for the said purpose. e) The Hon'ble High Court specifically included investment in GSL as part of the undertaking to be demerged: The Hon’ble Delhi High Court passed an order dated 25.05.2010 demerging the Business Convention Division along with all its assets to Godavari Shilpkala Hospitality pvt. Ltd. (the assessee company) w.e.f. 01.04.2009 (being the appointed date). We are reproducing relevant clause(refer page no. 38 of PB): “i) All the identified property of or required for the Business Convention Division wherever situated, whether movable or immovable, tangible or intangible, including identified investments (including specifically investment in Godavari Shilpkala Ltd), all rights (rights including under any Government or customer contracts or other contracts or agreements),
ITA No. 2087/Del./2014 17 entitlements, licenses, registrations, contracts, priviledges and all other rights and advantages of whatsoever nature and wheresoever situated belonging to or in the ownership, power of possession and in the control of or vested in or granted in favour of or held for the benefit of or enjoyed by the Business Convention Division.” From the aforesaid, your honour will appreciate that the demerged undertaking or the Business Convention Division specifically included investment is GSL which on the date of the demerger on 1st April 2009 were in the form of Rs. 72 crores investment by way of debentures. Further investment of Rs. 128 crores by way of subscription of debentures was made by Claridges Hotels Pvt. Ltd in GSL between the date of demerger i.e. the effective dated i.e. 23 June 2010. f) Subsequent investments from appointed date till effective date were held under trust by CHPL: The Hon’ble Delhi High Court also provided that since their order was passed only in May, 2010 and the appointed date being 01.04.2009, all subsequent business/investment etc. till the date of the High Court order that had taken place in the Business Convention Division would be held as investment/trust by Claridges Hotels and would be transferred by way of demerger. (refer clause 4.1 on page no. 44 of PB) g) Also refer clause 7.1.1 on page no. 47 of the paper book which specifically allows CHPL to expand the investment in the demerged undertaking with concurrence of GSHPL. (refer clause 7.1.1 on page no. 47 of paper book) h) Rs. 128 crores were further invested into OCDs of GSL during the financial year 2009-10. i) As a consequence, the total investment in GSL on the date of the order of the Hon’ble Delhi High Court dated May, 2010 was Rs.200 crores by way of OCD. j) The Hon’ble Court had also ordered that by virtue of the transfer of all the Business Convention Division into assessee company, assessee company would issue shares
ITA No. 2087/Del./2014 18 in favour of UBSL Mauritius in the ratio of 1:6 i.e 6 shares to be issued by GSHPL in lieu of 1 share held by UBSL in CHPL. The total share premium amount constitutes to Rs 3,25,34,86,385. k) The Assessing Officer has wrongly held that the Hon’ble Court had not directed the OCD in GSL of Rs.200 crores to be transferred to GSHPL. Kindly refer clause 1.11 on page no. 39 of PB. l) Rs. 72 crores were included in Part III of schedule of property by Hon’ble Delhi high Court. (refer pg. no. 61 of PB) 2. Hence, the entire Rs.200 crores of OCD’s were transferred on the direction of the Hon’ble Court and II. SOURCE OF INVESTMENT WAS FULLY EXPLAINED:
1. 1. Rs.200 crores investment in GSL was out of funds provided by IHCL on sale of shares by Hotel Claridges on which capital gains tax was duly paid. Bank statement of Claridges Hotel was also filed to establish the source of funds. Kindly refer page no. 111-113 of the PB.
2. The ld. AO was of the belief that funds had come from abroad and a notice u/s 142(1) to that effect was issued by him on 18th March 2013. (refer page no. 75 of the PB) 3. Soon after receiving the reply from us and realizing his mistake the ld. AO took a reverse stand and picked up a technical issue to make the addition of Rs.200 crores. III. AUDITORS OF CHPL TOOK COMPLETE COGNIZANCE OF THE ORDER: It is further submitted that the auditors of the demerged company i.e. Claridges Hotels Pvt. Ltd took complete cognizance of the order of the High Court and passed requisite entries transferring the convention business along with debentures to the tune of Rs. 200 crores etc in their books of account. Please refer the note forming part of the audited Balance Sheet of Claridges Hotels Pvt. Ltd on page no. 80 of the PB. IV. AUDITORS OF THE ASSESSEE COMPANY TOOK COMPLETE
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COGNIZANCE OF THE ORDER: The appellant company also has, consequent to the assets being transferred to it by Claridges Hotels Pvt. Ltd and shares having been issued by it to M/s UBSL, Mauritius, given a detailed note in its audited books of account to its share holders. Refer page no. 23 of PB V. Judgements relied upon are not applicable to the case of the assessee:
1.
The ld. AO has merely cited judgments on an academic basis that the word ‘income’ is not limited by the word ‘profit and gains’; the motive of the payer is not relying while deciding whether the receipt is revenue or capital, payments constitute income because they are referable to a definite source, income is a word of ‘elastic import’, assessee must prove the source of receipt, taxability cannot be decided on the basis of entries which the assessee may choose to make in his accounts etc.
2. Detailed submissions were given on the issue of judgements relied upon the ld. AO while making the impugned addition which has been reproduced by the ld. CIT(A) in its order on page no. 16 in para 5.9.
3. The ld. CIT(A) has held in para 6.9 that reliance placed by the ld. AO on various judgments was of no help. (refer page no. 29) VI. ALTERNATE SUBMISSION 1. Issue of shares by assessee company for consideration other than cash: a) Without prejudice to the aforesaid, assuming for the sake of arguments that there was no demerger and debentures of Rs. 200 crores had been transferred by CHPL to Assessee Company in lieu of shares of GSHPL in the ratio of 1:6, the tax effect on this transaction in the hands of GSHPL would also have been nil. This is because such a transaction would have tantamounted to issue of shares by GSHPL for consideration other than cash. b) It is trite law that shares can be issued by a company for ITA No. 2087/Del./2014 20 cash/bank or for consideration other than cash/bank. c) In this hypothetical situation, Assessee Company would have got debentures of Rs. 200 crores as assets against which it would have issued shares in the ratio of 1:6. This is a perfectly normal and legitimate transaction. d) This is a transaction on capital account being issuance of shares and is not taxable under the Income-tax Act, 1961. e) Share premium is also linked to share capital. It belongs to the share holders of the company. It can only be used for the purpose of issuing bonus shares and cannot be diluted/eroded against the normal business expenses of the company. Hence, share premium forms the part of the share capital of the company and therefore, one can safely state that in such a hypothetical situation, shares of the value of Rs. 200 crores have been issued against assets of Rs. 200 crores transferred to the company.
How can a transfer in contravention of a direction become income? a. The ld. AO has made such a huge addition to income by stating only three lines i.e. transfer in contravention of the directions of the High Court. b. One fails to understand that in what manner, any transaction which is in contravention to the directions of a court becomes an income. c. For a receipt to be classified as income, one has to go into its nature and check whether it fits in the overall definition of income under the Act. d. The following judgments of the Hon’ble Supreme Court and jurisdictional High Court are on the proposition that monies brought in by way of share capital cannot be taxed unless the source of the same is in doubt. In the case of the assessee, needless to add the source is very well established and accepted by the ld. AO: - Lovely Exports (P) Ltd (2008) 216 CTR (SC) 195 - CIT v. Value Capital Services (P) Ltd (2008) 307 ITR
ITA No. 2087/Del./2014 21
334 (Del) - CIT v. M/s Pondy Metal and Rolling Mill- ITA 788/2006 (Delhi HC) 3. Transfer of assets to wholly owned subsidiary is not transfer as per section 47(vib): Without prejudice, the ld. AO has also not appreciated the fact that the transfer of debentures by a demerged company to the resulting is not transfer as per clause (vib) of section 47 if the resulting company is an Indian company.
We have heard the rival submissions and have gone through the entire material on record and written synopsis filed by both the parties. We have examined the Balance Sheet of CHPL and the assessee company and find that the current asset of Rs. 72,23,63,000 includes debenture application money pending allotment and, therefore, is shown as current asset. As per the order of the Hon'ble Delhi High Court the current asset of the said amount appearing in the schedule of property would stand transferred to the assessee company. This factual finding of the Ld. CIT(A) is correct and we endorse the same. Even otherwise, the Assessing Officer has not been able to show what these current assets of Rs. 72,23,63,000 represent if they are not OCDs. Therefore, the issue involved according to us is of a sum of Rs. 128 crores of OCDs transferred subsequent to 31.03.2009 till the date of the order of Hon'ble Delhi High Court which is dated 25.05.2010.
ITA No. 2087/Del./2014 22 9.1 We have also perused the relevant clauses of the Scheme of Demerger and more specifically, clause 7.1.1 at page-47 of the Paper Book which is reproduced below:-
CHPL shall hold the assets, investment and liabilities comprised in the said Demerged Undertaking 1 with reasonable diligence and in the same manner as it had been doing hitherto for, and CHPL shall not nor shall it agree to alter, expand or modify the same in any manner without the prior written concurrence of GSHPL.
According to the above clause, CHPL can alter, expand or modify the assets for investment held by it with the concurrence of GSHPL and, therefore, the sum of Rs. 128 crores as OCDs transferred by CHPL for consideration in the form of equity shares in the ratio of 1:6 is permissible as per the Scheme of Demerger approved by the Delhi High Court.
It has also been admitted by both the parties that the source of investment of Rs. 200 crores as OCDs is not the subject matter of examination u/s 68 of the Income- tax Act, 1961 in the hands of the assessee company. The source has been explained being money received by CHPL from the sale of shares held by it to Indian Hotels Company Limited. The company has also paid the capital gains tax on the said transaction. The Department had not even challenged this issue and, therefore, the only issue before us is whether Rs. 128 crores received by the ITA No. 2087/Del./2014 23 assessee company as OCDs between 01.04.2009 to 25.05.2010 is the income of the assessee u/s 2(24) of the Act. From the above discussion, we feel that it is merely a case where Rs. 128 crores of OCDs having been received by the assessee company against issuance of shares in the ratio of 1:6 to the owner of the said OCDs. It is thus a case of issuance of shares for consideration other than cash. We fail to understand how the consideration received can be said to be an income of the assessee company. The company has received debentures against which it has issued shares at a premium.
9.2 We further observe that in AY 2009-10, there was no requirement in law even in section 56 or any other section, which mandates that the company would not issue shares at other than the fair market value. Hence a company was free to issue shares at a premium or at par based on the decision taken by its Board.
Threfore, it is a simple case where shares have been issued for consideration other than cash being OCDs and this is a transaction clearly on capital account.
The Ld. CIT(A) has extensively dealt with this issue and his findings of facts are accurate and correct. We find no reason to interfere with the order of Ld. CIT(A) and the addition of Rs. 200 crores made by the Assessing Officer has rightly been deleted by the ld. CIT(A) vide impugned order. Therefore, the impugned order
ITA No. 2087/Del./2014 24 stands confirmed on the issue under consideration and the appeal of the Revenue, thus, deserves to fail being bereft of merit.
In the result, the appeal is dismissed.
Order pronounced in the open court on 27.11.2017.