ANNAPURNA TEXTURISERS P.LTD,MUMBAI vs. DCIT CIR 2(1), MUMBAI

DCIT Cir 2(1) Annapurna Texturisers Pvt. बिधम/ Mumbai Ltd. Pin- Hoecgst House, Backbay Vs. Reclamation, Nariman Point Mumbai-400021 स्थायीलेखासं./जीआइआरसं./ PAN No. AACCA9403E (अपीलाथी/Appellant) (प्रत्यथी / Respondent) : अपीलाथीकीओरसे/ Appellant by : Shri VimanlPunamiya, AR प्रत्यथीकीओरसे/Respondentby : Ms. S. Padmaja, DR सुनवाईकीतारीख/ : 26/04/2018 Date of Hearing घोषणाकीतारीख / 25/07/2018 : Date of Pronouncement आदेश / O R D E R

Per Sandeep Gosain, Judicial Member:

Annapurna Texturisers Pvt. Ltd. 1. Ld. CIT(A) has erred in disallowing the long-term capital loss amounting to Rs. 18,89,67,571/- incurred to the Appellant during the year.

3. The Ld. CIT(A) has failed to allow the set off of long term capital loss of Rs.18,89,67,571!- against long term capital gain earned of toRs. 15,92,31,0341- during the year under the inter-head adjustment of set off of losses as per the provisions of IT Act and the same is an allowable claim.

4. On the facts and circumstances of the case, the Ld. CIT (A) has failed toappreciate that the transaction and loss on sale of share is a genuine loss and out of business activities carried out by the assessee and the same is eligible to be set off against long term capital gain earned by the Appellant Further, since the transaction is treated as bonafide and genuine one, the motive of tax avoidance cannot be attributed on the Appellant and, further each and every purchase and sale of share transaction does not necessarily result

Annapurna Texturisers Pvt. Ltd. into profit and the profit on sale of shares depends on various factors of market conditions.

6. The appellant craves leave to add, alter, or modify the grounds of appeal.

2. The brief facts of the case as enumerated in the order of Ld. CIT(A) in para no. 3 are that the assessee is engaged in the business of providing the services such as office support, upkeep and maintenance and transportation. During the scrutiny proceedings, it was observed by the AO that assessee had shown to have purchased 73,80,000 Nos. of shares of M/s. Baroda Rayon Corporation Ltd. on 26.03.2009 from M/s. Tapti Synthetics Pvt. Ltd. The Assessee had claimed indexation from F.Y.1992-93, F.Y.1997-98 and F.Y.2008-09. These shares have been sold out on 29.03.2010 @ Rs.0.41 per share which works out to Rs.30,64,7501- whereas purchase price was on higher side. Thus, Assessee has shown capital loss of Rs.18,89,67,571/- and thus such loss had been set off against the capital gain of the property at Goa and thus, only return of income of Rs.2,31,2601- was filed. During the course of assessment proceeding, Assessee

Annapurna Texturisers Pvt. Ltd. was asked by the AO to furnish the details of purchase & sales of shares with supporting evidences and also to furnish the valuation of the shares as on 26.03.2009 and on 29.03.2010 as the company was ‘unlisted one’. Since the AO was not convinced, therefore detailed reply was sought from the assessee in this respect.

The assessee in its reply submitted that there was no restricting provisions which could restrict the Assessee to sale the shares below the purchase price. It was also the stand of the assessee that that the sale of shares at loss was on account of market conditions as the share prices of the companny had come down. However, such explanation of the Assessee was rejected by the Assessing Officer. According to the AO, the Assessee had failed to furnish requisite details, to prove the genuineness of transaction and said losses. The AO summarized his reasoning in Para 4.4. of the Assessment Order. According to the AO, the entire purchase & sale of shares had been structured as pre-plan to set off Long-term Capital Gain arising from sale of Goa Property. The shares had been purchased on 26.03.2009 and had been sold on 29.03.2010 at a very lower price. It was further held

Annapurna Texturisers Pvt. Ltd. by the AO that all the silent features of share transactions which the Assessee is well-versed was not there. The loss can be allowed only if it is incidental to any transaction and it should be of the character of trade and primary motive should be the profit. As per AO, the shares had been sold out without any purpose or basis and the details of purchase & sales of shares goes to show that there is a nexus between the purchaser and the Assessee. It was also held that the Assessee was going for sale of Goa property, hence, such arrangement had been made to create loss and to claim against long term capital gain. Therefore, the scheme had been made in such a way to include transaction designed to produce a loss to be offset against a gain previously made. In case, this arrangement was not shown, then the assessee would have to pay a higher amount of tax. At the same time another transaction was designed to produce almost matching gains which was not chargeable to tax. These two separate transaction were self-concealing. Thus, the AO reached to the following conclusion:-

Annapurna Texturisers Pvt. Ltd. i) The scheme is a pure tax avoidance scheme without any commercial justification in so far as the making of a profit is concerned. ii) The transactions are self-concealing and are designed to make neither a gain nor a loss. The tax payers would not have entered into the scheme, if a loss would be incurred. iii) These transactions have no commercial purpose apart from the avoidance of tax liability.

Thus, in this background, the AO had relied upon various case laws and finally reached to the conclusion that assessee had not discharged its onus and such share transaction had been arranged for showing loss. Since such transaction cannot be called as ‘business or commercial transaction’ and such loss was created only with a view to reduce the capital gain arisen out of sale of Goa property.

Aggrieved by the order of AO, assessee preferred appeal before Ld. CIT(A) and furnished additional evidence during the course of appellate proceedings.

Annapurna Texturisers Pvt. Ltd. Apart from that assessee had also furnished written arguments before Ld. CIT(A) and consequently, Ld. CIT(A) sought remand report on the additional evidences so filed by the assessee from the AO and after considering the case of both the parties, dismissed the appeal of the assessee by holding that assessee has arranged the affairs and has created unreliable and dubious documentary evidences only with a view to suppress the taxable capital gain of Rs. 15,92,31,034/- by setting off created loss on sale of shares and therefore, disallowance made by AO in respect of claim of capital loss of Rs. 18,89,67,571/- was sustained.

Aggrieved by the order of Ld. CIT(A), assessee has preferred the present appeal before us by raising the above grounds.

Annapurna Texturisers Pvt. Ltd. 2. The Ld. CIT(A) has failed to take into account the documentary evidences such as purchase agreement for shares, purchase and sales details, valuation report and other corroborative evidences to establish the genuineness of transaction carried out by the Appellant.

Annapurna Texturisers Pvt. Ltd.

Annapurna Texturisers Pvt. Ltd. 33 Copy of documents of RBI Compliance for 451-478 allotment of Equity shares byTapti Synthetics Pvt. Ltd. to Benson Overseas Holding 34 Copy of Annual Reports of BRC Ltd for 479-538 F.Y. 2004-2005 35 Copy of Annual Reports of BRC Ltd for 539-600 F.Y. 2006-2008 36 Copy of Annual Reports of BRC Ltd for 601-640 F.Y. 2008-09 37 Copy of Annual Reports of BRC Ltd for 640-684 F.Y. 2009-10 In this respect, Ld. AR submitted before us that all the above documents carry relevant details in respect of the grounds of appeal as per Memorandum of Appeal submitted by the assessee. It was further submitted that the documentary evidence submitted in Paper Book were not filed before the AO and the Ld. CIT(A), as the assessee was of the honest & sincere view that the evidences already placed on record would justify adequately the genuineness of the transaction of purchase & sale of Shares of Baroda Rayon Corporation Limited (BRC) and the consequent Long-Term Capital loss arising out of the said transaction. It was further submitted that all the documents by way of additional

Annapurna Texturisers Pvt. Ltd. evidence are of crucial and vital importance in order to justify the consideration paid for purchase of the shares of BRC and the consideration received towards the sale of shares of BRC.

On the contrary, Ld. DR contested the claim of the assessee and submitted that these details were not filed either before the AO or before Ld. CIT(A) and the assessee had not brought on record any reasonable cause that prevented it from filing the same before lower authorities. It was also submitted that all these documents were available with assessee even at the time of passing of assessment order and even these documents are not relevant for adjudicating the issue as these pertain to the audited accounts of the company whose shares were purchased and the agreements of such company with other entities.

After having heard the counsels for both the parties at length, we find that the main dispute between the parties is in respect of disallowance of long term capital loss incurred to the assessee during the year under consideration. As per the facts of the case, assessee had purchased 73,80,000/- No. of shares of M/s. Baroda Rayon Corporation Ltd. on 26.03.2009 from M/s. Tapti Synthetics Pvt. Ltd. These shares have also been sold out

Annapurna Texturisers Pvt. Ltd. by the assessee approximately after one year on 29.03.2010 @ Rs.0.41 per share which works out to Rs.30,64,750/- whereas purchase price was on higher side. In these circumstances, revenue had asked the assessee to show capital loss as such loss had been set off against capital gain of the property at Goa.

Although during the course of assessment proceedings as well as appellate proceedings, the assessee had filed respective details of purchase and sale of shares with supporting documents, but the revenue had rejected all those evidences so filed by the assessee by holding that ‘such share transaction has been arranged by the assessee for showing loss’. In these circumstances, it is even otherwise necessary and imperative on the part of the assessee to prove that ‘the transaction was genuine and legitimate and it was within the parameter of law.’ Although the assessee had already mentioned the reasons for investment of 73,80,000 equity shares of BRC Ltd by the assessee company in his written submission and has also referred to the documents and now, assessee wants to produce by way of additional evidence the documents mentioned above in order to prove that Annapurna Texturisers Pvt. Ltd. the ‘transaction for purchase of share was genuine and legitimate and within the parameter of law.’ Ld. AR also drawn our attention to para no. 9 of its written submission, which carries the details of documents and the relevance with the claim of the assessee and the same is reproduced below:-

9.1. As stated above the appellant company was holding for past several years 37259 (7509+ 29750) shares of BRC LTD as promoter of BRC Ltd. InBRC Ltd held as Investment, the appellant company had purchased 73,80,000 Equity Shares from Tapti Synthetics P Ltd. vide agreement dated 26.03.2009.

9.2. With regard to the decision for the Investments in shares of BRC Ltd, by the appellant Company, it is pertinent to note that the Appellant as a promoter of BRC Ltd had gathered information that the Management of BRC Ltd has taken all the necessary steps and that in a short time BRC Ltd will be operational with expanded capacity and consequently there will besubstantial increase in valuation of shares of BRC Ltd.

Annapurna Texturisers Pvt. Ltd. 9.3. The rehabilitation of BRC Ltd was evident to the appellant company on account of following steps taken by the management of BRC Ltd.

9.4. Between the years 2004 to 2006, a reference was made by BRC Ltd. to the Board for Industrial and Financial Reconstruction (referred as BIER hereunder) under the provisions of the Sick Industrial Companies (Special Provision) Act 1985, for rehabilitation of the company. The comprehensive rehabilitation package submitted by the Promoters of BRC was approved by BIFR on 22nd May, 2006. The BRC Ltd.for pursuing the rehabilitation of the company based on the BIFR scheme, had raised funds in following manner a) Financial Collaboration with Overseas Equity Fund CLEARWATER CAPITAL PARTNERS for Issue of debentures. b) Equity Shares to the promoters, Halcyon Enterprises Pvt. Ltd and Clearwater Capital partners. c) Appointment of Turnaround Consultants Mr. Robert Petty and Mr. Narayan Seshadri as Directors of BRC Ltd.

Annapurna Texturisers Pvt. Ltd. e) Financial collaboration with Benson Overseas Holding Ltd. f) BRC Ltd was able to revive itsoperations largely due to the efforts of themanagement of the BRC Ltd to restart its multiproduct manufacturing operations by pumping in additional funds to the tune of Rs 150 crores approx.

BRC Management arranged for re-structuring of existing borrowing for Financial Institution resulting in huge sacrifices by the financial institutions and banks by way of concession in the interest for facilitating the revival of BRC Ltd. The above facts are evident from the attached Audited accounts of BRC Ltd for the year ended 30.09.2006 (Ref point no 2 of Page No. 278 of Paper Book 2 submitted on 22.03.2018).

9.5. BRC Ltd had also appointed Turn Around Experts Shri Robert Petty and Shri Narayan K. Seshadri (EX- Arthur Anderson) as additional directors on the Board of Directors taking into consideration their wide experience and also considering potential foreign and domestic collaborations that they had promised to bring to facilitate BRC Ltd on a revival strategy for its business.The above factsare evident fromthe attached Audited accounts of BRC Ltd for the year ended

Annapurna Texturisers Pvt. Ltd. 30.09.2006. (Ref Item No 4 & 5 of Page No. 275 of Paper Book 2 submitted on 22.03.2018)

9.6.BRC Ltd had entered into agreement with Halcyon Enterprises Private Limited whereby it was agreed between the parties that as part of the restructuring process of \ the company, BRC Ltd will be issuing and allotting to Halcyon Enterprises Private \ Limited 12% Secured Optionally Convertible Cumulative Debentures of the face value of Rs 100 each and of the aggregate nominal value of Rs 8,00,00,000/-.(Rupees Eight Crore Only) The above facts are evident from copy of agreement between BRC Ltd and 'Halcyon Enterprises Private Limited for your perusal (Ref Page No. 330-372 of Paper Book 2 submitted on 22.03.2018)

9.7.BRC Ltd had entered into agreement with Yes Bank Limited whereby it was agreed between the parties that Yes Bank Limited shall lend to BRC Ltd Loan of facility amount of Rs 25,00,00,000/-(Rupees Twenty Five Crore Only) on such terms and conditions as mentioned in the agreement. The said loan was availed by BRC Ltd in the form ofWorking Capital Demand Loan thereby enabling the company to meet its working capital financing need and facilitating the rehabilitation process. The above facts are evident fromcopy of agreement between BRC Ltd and Yes Bank

Annapurna Texturisers Pvt. Ltd. Limited (Ref Page No. 373-407 of Paper Book 2 submitted on 22.03.2018)

9.8.BRC Ltd had entered into agreement with Clearwater Capital Partners India Private Limited on whereby it was agreed between the parties that the company will be issuing to Clearwater Capital Partners India Private Limited 2,00,000 (19%) and 3,00,000 (15%) UTI Debentures of the face value of Rs 100 each and 3,00,000 (19%) and 2,65,000 (15%) and 3,25,000 (14%) Institutional Debentures of the face value of Rs 100 each aggregating nominal value of Rs 13,90,00,000/-. The above facts are evident from copy of agreement between BRC Ltd and Clearwater Capital Partners India Private Limited and Sponsors (Ref Page No. 408-450 of Paper Book 2 submitted on 22.03.2018)

9.9.The key shareholders of BRC, Tapti Synthetics Pvt. Ltd. had also mobilised funds towards supporting the efforts of the Promoters of BRC for rehabilitation of BRC by approaching an overseas Equity Fund Benson Overseas Holding Ltd, who had invested in Equity of Tapti Synthetics of Rs. 2,44,48,000/- The above facts are evident fromcopy of documents of RBI Compliance for allotment of Equity shares by Tapti Synthetics Pvt. Ltd to Benson Overseas Holding - (Ref Page No. 451- 478 of Paper Book 2 submitted on 22.03.2018).The

Annapurna Texturisers Pvt. Ltd. Benson Overseas had also indicated their interest to participate in Equity of BRC Ltd for its Rehabilitation Scheme.

9.10.Also BRC Ltd, was holding a very large assets based, which includes the Industrial Land and other Constructions at different places of Udhana, Bhedwad and Dindoli especially in the name of 'Laxminarayan Industrial Estate' the land admeasuring 4,42,115.38 sq. mtr. and allied constructions for the total valuation of Rs. 322 Crores. The Copy of the Valuation report for the said Land valuing the Land as on 31 .03.2009, when the appellant Company had made investments in BRC has placed on record. (Refpage No. 150-166 of Paper Book 1 submitted on 07.03.2018).

9.11. Pursuant to lining up of the required funds for rehabilitation by BRC Ltd on account of various financial collaborations as mentioned above and the Large assets based of BRC Ltd, the company was able to revive and expand its Manufacturing and Business operations.

The turnover of the Company has also been increased by many folds as under.

Particulars For the For the For the For the period ended period ended period ended period 30.09.2004 30.09.2005 30.09.2006 ended

Annapurna Texturisers Pvt. Ltd. (Rs. in (Rs. in (Rs. in 30.03.2008 Lakhs) Lakhs) Lakhs) (Rs. in Lakhs) Turnover 1,384.39 4,779.90 10,656.97 18,930.06 /sales The said facts are evident from copy of Annual Reports and Audited Accounts of BRC Ltd for F.Y. 2004-2005, F.Y. 2006-2008 on the perusal of which your honour would find it evident that the Sales of the company have augmented. (Ref Page No. 509 & 575 of Paper Book 2 submitted on 22.03.20 18).

9.12. Based on the above stated development related to the Business of BRC LTD on account of Overseas Financial foreign collaborationsresulting in rehabilitation and expansion of the Business operations of BRC Ltd the appellant was confident of theexpected Glory of the BLUECHIP STATUS of the shares of BRC LTD in the near future. In anticipation of the substantial Growth in the shares Prices of BRC Ltd in the near future on account of the rehabilitation of business operations of BRC Ltd the appellant had decided to make large investment in equity shares of BRC Ltd. Accordingly the appellant Company has entered into an agreement with Tapti Synthetics P Ltd andpurchased 73,80,000 Equity shares of BRC Ltd @ Rs. 20 each.

Keeping in view the facts of the case, arguments addressed by the parties, documents and judgments relied upon as well as orders passed by revenue authorities, we find that the respondent could not point out any defect in the authenticity and relevance of the documents as pointed out by the assessee. We are of the considered view that these documents are necessary for proper disposal of the issue and in order to decide the substantial issue of facts on merits, with regard to proving the genuineness of transactions of sale and purchase of shares, it is necessary to take on record the evidences, which the assessee has now produced, failing which there will be substantial failure of justice and therefore while relying upon the judgment of Hon’ble Supreme Court in the case of Tek Ram 262 CTR 118, we allow the application moved by the assessee for admitting the additional evidences.

Since, we have admitted the additional evidences as mentioned in detail in the above portion of our order, which requires necessary verification. Therefore, considering the interest of justice, we set aside the order of Ld. CIT(A) and remit

Annapurna Texturisers Pvt. Ltd. the matter back to the file of AO with a direction to verify all additional evidences and thereafter while considering the documents, pass afresh order of assessment.

Before parting, we may make it clear that our decision to restore the matter back to the file of AO shall in no way be construed as having any reflection or expression on the merits of the dispute, which shall be adjudicated by the AO independently in accordance with law.