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Facts
The assessee, an investment company, faced two primary adjustments. First, the AO added Rs. 2,12,31,641/- to its book profit under Section 115JB for AY 2015-16, arguing double benefit from shares gifted in AY 2012-13 (expensed) and then reinstated in AY 2015-16 (credited to reserves). Second, the AO disallowed Rs. 11,04,54,306/- of long-term capital loss from the off-market sale of shares to a group company, deeming it an artificial transaction due to the sale price being lower than the prevailing market price.
Held
The tribunal held that the reinstatement of gifted shares resulted in a capital receipt, not taxable under Section 115JB for AY 2015-16, especially since the revenue failed to make the proper adjustment in AY 2012-13. Regarding the capital loss, the tribunal found the assessee's method of determining the sale price for large volume off-market transactions to a group company, based on average market rates, was justified and not a sham. Thus, the disallowance of the long-term capital loss was erroneous.
Key Issues
Whether a capital receipt from reinstated gifted shares, credited to reserves, can be added to book profits under Section 115JB; and whether long-term capital loss from off-market sale of shares to a group company at a negotiated price, different from daily market quotations, constitutes an artificial transaction.
Sections Cited
Section 115JB, Section 115JB(2) Explanation 1, Section 143(3), Section 147, Section 263, Section 48, Rule 11UA, Section 227(1A) of Companies Act, 1956
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Income Tax Appellate Tribunal, DELHI BENCH “G”: NEW DELHI
Before: SHRI SAKTIJIT DEY & SHRI M. BALAGANESH
O R D E R PER M. BALAGANESH, A. M.: 1. The appeal in AY 2015-16, arises out of the order of the Commissioner of Income Tax (Appeals)-8, New Delhi [hereinafter referred to as „ld. CIT(A)‟, in short] in Appeal No. 10357/17-18 dated 16.01.2019 against the order of assessment passed u/s 143(3) of the Income-tax Act, 1961 (hereinafter referred to as „the Act‟) dated 30.12.2017 by the Assessing Officer, ACIT, Circle-23(1), New Delhi (hereinafter referred to as „ld. AO‟).
The assessee has raised the following grounds of appeal before us:-
“1. That the Order passed by the CIT(A) is bad in law as the same has been passed without considering and discussing the detailed written submissions and case law submitted by the appellant company and, therefore, same deserves to be quashed. 2. That the CIT(A) erred in upholding adjustment of Rs.2, 12,31,641/- in Book Profit of the appellant company for the purpose of Section 115JB of the Act without considering the facts of the case and also the decision of the Hon'ble Supreme Court in the case of Apollo Tyres Ltd. vs. CIT (2002) 255 ITR 273 (SC) and other judgements.
3. That the CIT(A) erred in upholding the disallowance made by the AO of Rs. 11,04,54,306/- in the amount of Long Term Capital Loss to be carried over without appreciating the facts of the case and the legal position that the appellant company had correctly determined the amount of Capital Loss adopting the rate at which shares were actually sold and the AO could not determine the Capital Loss on notional basis by wrongly adopting the rate as was prevailing in the stock exchange on the relevant date disregarding the volume of the shares and also the agreement entered into by the appellant company in respect of sale of shares under reference.
4. That the appellant company craves leave to add, alter, modify, withdraw any of the grounds hereinabove at any time or hereinafter and at the time of hearing of the appeal.”
We have heard the rival submissions and perused the materials available on record. The assessee is a private limited company carrying on the business of investment company and also engaged in the activity of purchase and sales of shares and securities. During the assessment proceedings, it has been observed that the assessee company has received the equity shares of M/s SRL. Ltd as an investment, which were gifted by the assessee company during FY. 2011-12 to below mentioned persons. Details of the investment reinstated during the FY 2014-15 as under-
Name of the Name of the Face Total no. Total Date of employees/person Scrip value of of shares consideration transactions from whom such the scrip paid shares were including forfeited share premium Dr. Phadke SRL 10 20S000 7077214 18.07.2014 Limited Dr. Subhendu Roy SRL 10 410000 14154427 09.03.2015 Limited TOTAL 615000 21231641
It was seen that an amount of Rs. 21231641/- being shares gifted in earlier year and taken back has been credited directly to the Reserve and Surplus account without routing it through the P&L account. In this regard, the notes to the accounts states as under - “During the year ended on March 31, 2012 the Company had gifted 7,50,000 equity shares of Super Religare Laboratories Ltd. "SRLL" (held by it as Non-Current investment as a promoter of SRLL) to the employees and key consultants of SRL Diagnostics Pvt. Ltd. "SDPL", a wholly owned subsidiary of SRLL The shares had been gifted with the objection of motivating the key consultants of subsidiary of SRLL for creating a sense of ownership among them and building strong and long term relationship between SRLL and the consultants. The gift of the shares by the company was subject to the condition that the engagement agreement of the Donee (Key Consultants) with SDPL would continue for the balance period of the engagement agreement or for three years from the date of execution of the gift deed, ie. July 7,201, whichever is higher. During the current year, 615000 equity shares gifted by the company have been surrendered by the recipients due to non fulfillment of the conditions mentioned in the Gift deed. Accordingly, these shares have been reinstated as Investment during the year.”
Since this transaction was not routed through profit and loss account and directly credited to reserves and surplus, the assessee was show caused by the ld. AO as to why the same should not be considered for the purpose of computation of book profits u/s 115JB of the Act. The assessee in its reply admitted that when the shares were gifted to the aforesaid persons in Asst Year 2012-13, the cost of investment was charged off to profit and loss account , which was a capital expenditure, and the same was added back in the computation of income under normal provisions of the Act. However, erroneously, it was omitted to be added back in the computation of book profits u/s 115JB of the Act. It was submitted that merely because a particular receipt is directly credited to reserves and surplus instead of routing it through profit and loss account, the said receipt cannot be brought to tax while computing book profits u/s 115JB of the Act. It was pointed out that the accounts of the assessee have been duly prepared in accordance with the provisions of the Companies Act and the same had been duly approved by the shareholders in the Annual General Meeting. Hence the ld. AO is not empowered to tinker with the audited financial statements by making certain additions / deletions except those items which are reflected in Explanation 1 to section 115JB(2) of the Act.
Reliance in this regard was placed on the decision of the Hon‟ble Apex Court in the case of Apollo Tyres Ltd reported in 255 ITR 273 (SC).
The ld. AO however, did not heed to the aforesaid contentions of the assessee and proceeded to consider the receipt of Rs 2,12,31,641/- as an item to be added back while computing book profits u/s 115JB of the Act. The ld. AO while doing so made a categorical observation that in Asst Year 2012-13, the income of the assessee was determined under normal provisions of the Act and the assessee had claimed the cost of investment that was gifted to aforesaid persons as an expenditure in the profit and loss account while computing book profits u/s 115JB of the Act. However, in Asst Year 2015-16 (i.e. during the year under consideration), the assessee‟s income is determined in accordance with provisions of section 115JB of the Act. The assessee in the instant case had taken double benefit in respect of computation of book profits u/s 115JB of the Act by claiming expenditure in Asst Year 2012-13 and not offering the same in Asst Year 2015-16. With these observations, the plea of the assessee was rejected by the ld. AO which was upheld by the ld. CIT(A).
The aforesaid facts are not in dispute before us. We find that the scrutiny assessment for the Asst Year 2012-13 has been completed in the hands of the assessee u/s 143(3) of the Act on 20.1.2015 finally determining income under normal provisions of the Act. In this assessment, the mistake committed by the assessee by not adding the cost of gifted shares (which is admittedly a capital expenditure) while computing book profits u/s 115JB of the Act. The ld. AR before us made a statement from the Bar that this assessment had become final and the same was not subjected to reopening u/s 147 of the Act by the ld. AO or subjected to revision u/s 263 of the Act by the ld. PCIT. Hence the revenue had missed the bus to make suitable adjustment in Asst Year 2012-13 while computing book profits u/s 115JB of the Act. We find that admittedly, the receipt of shares due to surrender of gift during the year under consideration is a capital receipt. There is absolutely no quarrel on this point. The orders of the lower authorities also does not even suggest that the same is a revenue receipt.
The only grievance of the revenue is that since in Asst Year 2012-13, at the time of gifting of shares, the value thereon was not added back by the assessee in the computation of book profits u/s 115JB of the Act and hence when the said shares were partially surrendered during the year under consideration, the receipt thereof would have to suffer tax u/s 115JB of the Act in Asst Year 2015- 16. Though this argument prima facie becomes acceptable on the grounds of equity, in our considered opinion, the same cannot be brought to tax in Asst Year 2015-16 u/s 115JB of the Act. It is not in dispute, the total income of the assessee is determined u/s 115JB of the Act for Asst Year 2015-16. It is not in dispute that the assessee had not sought any benefit with regard to the subject mentioned receipt on account of surrender of gift of shares while computing its income under normal provisions of the Act for Asst Year 2015-16. However, in order to tinker with the audited financial statements read together with the notes thereon, the ld. AO would be empowered to do the same only in respect of items that are specifically mentioned in Explanation 1 to section 115JB(2) of the Act. The law in this regard is very well settled by the decision of the Hon‟ble Apex Court in the case of Apollo Tyres Ltd reported in 255 ITR 273 (SC). Now let us see whether the said receipt of Rs 2,12,31,641/- on account of surrender of gift of shares is per se a capital receipt or a revenue receipt. There is no quarrel at all that the said receipt is indeed a capital receipt. Hence the assessee would be justified in directly crediting the same in Reserves and Surplus in Asst Year 2015-16. As stated earlier, the mistake committed by the assessee which stood subsequently endorsed by the revenue was in Asst Year 2012-13 wherein the cost of investment of gift of shares should have been added back in the computation of book profits u/s 115JB of the Act. Even if this item does not fall under any of the items mentioned in Explanation 1 to section 115JB(2) of the Act, still the same ought to have been added back for the purpose of computation of book profits u/s 115JB of the Act for the simple reason that the accounts per se were not in accordance with provisions of section 227(1A) of the Companies Act, 1956 as „Capital Expenditure has been debited to Revenue Account‟. But since revenue had missed the bus in Asst Year 2012-13, the correct treatment given by the assessee in Asst Year 2015-16 which is in accordance with the provisions of the Companies Act and the said receipt not falling under any of the items reflected in Explanation 1 to section 115JB(2) of the Act, the said receipt cannot be taxed u/s 115JB of the Act in Asst Year 2015- 16. Accordingly, the ground no.2 raised by the assessee is allowed.
The next issue to be decided is with regard to disallowance of long term capital loss of Rs 11,04,54,306/-.
We have heard the rival submissions and perused the materials available on record. During the assessment proceedings, it has been noticed that the assessee has shown Long Term Capital Loss of 61,55,98,438/- for AY 2015-16 on sale of quoted shares of Religare Enterprises Ltd. The details of loss on sale of such shares as submitted by the assessee (as per IT Act, 1961) vide his submissions dated 27.11.2017 are as under:-
Sl No. Name of No. of shares Indexed Cost of Date of Proceeds Loss on sale Scrip(Quo and dare of acquisition disposal realized of investment ted) acquisition 1. Religare 14,06,250 on 44.39,30,636/ 13.03.2015 47.10,93,750/- 27163114 Enterprise 13.12.2006 64,38.35.755/ 13.03.2015 49,14,63,760/- (35,23.71. s Ltd 14,67,056 on 995) 2402.2010 12,09,000 on 24.02.2010 69,54.04,557/ 30.03.2015 40.50.15,000/- (29.03,89, 557) TOTAL 198,31,70.948 1,36.75.72.510/ (61,55,98. 438 On perusal of the chart mentioned above, it has come to notice that there is a huge Long Term Capital loss against the investment made by the assesse. It is further seen that the shares were sold to the group company M/s RHC Holding Pvt. Ltd. The assessee company is a part of Religare group of companies. The shares have not been sold at the quoted price at the exchange. Therefore, prima-facie it appeared that the transaction is not a genuine transaction but a sham transaction entered to create artificial/contrived losses Thus, vide order sheet dated 13.12.2017. The assessee was asked to explain that why the sale consideration in respect of sale of shares to group company is Page | 6 not taken at the market price since the said shares is a listed share and is traded frequently on the recognized stock exchange. The assessees vide his submission dated 26.12.2017 submitted here as under:
In regard to valuation of shares and determination of sale consideration at Rs. 335 per shares, we have already explained quite in detail that transaction between the companies was at arm's length price. The rate of Rs 335 per share was determined on the busis of average market rate of shares prevailing on the National Stock Exchange for the last one year. In was further submitted that for the purpose of transaction of such a large volume of shares, the rate on Stock Exchange on a particular date cannot be the determinative factor. We have also submitted that normal transaction on the Stock Exchange had been for the quantity of shares around Rs. 60,000/- shares and it was obvious that in case such a large quantity of shares would have been offered in the market, apart from difficulty in getting the buyer, the rate would have come down to a substantial lower level, may be it would have been less than Rs 300 per shares. Therefore, the basis of Market Quotution as on 13th march 2015 cannot be the price to be adopted in respect of transfer of shares in the fact and circumstances of the case of the assessee company. In this regard, your goodself has referred to Rule 11UA and has calculated the notional sale price at the rate of Rs. 372 per share in respect of shares sold on 13 March 2015. In this connection, we may invite your kind attention to para 9 (d) of our letter dated 21 December, 2017. It has been duly explained therein that in respect of transfer of shares as per the provisions of section 48 of the Act, only the actual consideration received by the assesee company is to be conserved. In your query, you have not referred to any provision of the Act, which empowers our goodself to adopt market rate in respect of shares sold by the assessee company instead of actual sale consideration as per the market quotation or as per the Rule 11UA of the Income Tax Rules. In the absence of any provision in the Income Tax Act, to this extent, no adjustments on a notional basis can be made in sale consideration of the shares sold by the assesee company. In this regard, we have referred to your goodself the decisions of the Hon'ble Supreme Court in the case of CIT vs. George Henderson And co. ltd. (1967) 66 ITR 622 (SC) and CITvs. Gillanders Arbuthonot and Co., Ltd (1973) 87 Page | 7 ITR 407 (SC) and also the decisions of the Hon'ble High Court in the case of CIT vs. Nilofer I. Singh-309 ITR 233 (Del) and Dev Kumar Jain vs. ITO & ANR (2009) 309 ITR 240 (Del)
The contention of the assessee has been examined The shares that have been sold was listed and quoted at the stock exchange. The assessee's average cost price per share comes to Rs. 335.53 (as per the books of accounts). These shares have been transferred to the group companies M/s RCH Holdings Pvt. Ltd. at a price of Rs. 335 per share and thereby creating a cash loss/books loss of Rs. 2163622/-. The market price of the shares is as under-
Date Open High Low 1 Last Close No. of Value as per Price Price Price Price Price shares market sold pricc(at lowest price as per Rule 11UA) 13.03.2013 383.00 399.50 372.60 372.65 377.35 2873306 1070593816 30.03.2015 337.90 344.95 337.00 343.00 342.20 1209000 407433000 Total 1478026816 Thus against the market price of Rs. 1478026816/-, the assessee has actually charged Rs. 1367572510/-. Thus, an amount of Rs. 110454306/-is the amount of loss artificially created out of incestuous transaction made by the assessee. The profits on sale of STT paid shares(ON market) is exempted while the income from off market transactions are taxable. The assessee has done off- market transaction in shares with the group company in shares of another group company. The loss created out of a transaction between the group companies is not treated as genuine loss. This amount is added to the computation of long term capital gains/loss. The resultant loss of Rs. 50,51,44,132/- is allowed to be carried forward.
At the outset, the following facts are undisputed and indisputable:- a) The assessee had sold 2873306 equity shares of Religare Enterprises Ltd for Rs 335 per share on 13.3.2015 in off-market trade to its related company M/s RHC Holding Pvt Ltd. The market price of Religare Enterprises Ltd as listed in the stock exchange on 13.3.2015 was Rs 372.60 per share. b) The assessee had sold 1209000 equity shares of Religare Enterprises Ltd for Rs 335 per share on 30.3.2015 in off-market trade to its related company M/s RHC Holding Pvt Ltd. The market price of Religare Enterprises Ltd as listed in the stock exchange on 30.3.2015 was Rs 337 per share. c) Since the shares were sold in off-market by the assessee, there is no question of chargeability of Securities Transaction Tax (STT) and consequently the gains received, if any, on sale of such shares would be liable for taxation in the hands of the assessee. d) The assessee had determined the sale price at Rs 335 per share based on average market rate of shares prevailing on the National Stock Exchange (NSE) for the period of 12 months. The basis of this workings are enclosed in pages 36 to 42 of the Paper Book filed before us. No mistake whatsoever has been found by the revenue in these workings.
We find that the assessee had not taken any figures from the air. Rather it had taken figures only from the open market listed price and had adopted the average of it and arrived at Rs 335 per share which is a mutually agreed price between the assessee and its group company. Hence at the first instance , we hold that the transactions of the assessee carried out with its group company cannot be construed as ingenuine or sham. The lower authorities grossly erred in making this observation in their respective orders. If the sale transaction is to be considered as ingenuine or sham, then the revenue ought to have disallowed the entire long term capital loss claimed by the assessee in the sum of Rs 61,55,98,438/-, whereas , the revenue had resorted to disallow only Rs 11,04,54,306/- and had even allowed the remaining loss of Rs 50,51,44,132/- to be carried forward.
Now another issue that crops up is that when the prevailing market price is very much available to the assessee to effect the sale transaction through a registered stock broker in a recognized stock exchange, whether it is justified in ignoring the same and effect an off-market trade at a mutually agreed price as explained supra. In this regard, we find that the assessee had been consistently maintaining the same stand that normally the shares of Religare Enterprises Ltd that were traded in the last 11 months during the year under consideration were in the range of 55000 to 60000 shares only, whereas the impugned transaction is to the extent of 4082306 shares in two tranches. Hence obviously when this kind of huge quantity of shares that were subjected to transfer more particularly between the group companies, it is quite possible that the market price of the shares of Religare Enterprises Ltd would have plummeted drastically due to panic situation created, which would in turn would result in huge loss to various retail investors. Considering this, the assessee had chosen to transact the huge volume of sale transactions which is quite abnormal when compared to the average trade that had happened in the last 11 months, by way of off-market by considering the average market price of shares that prevailed in the last 11 months of the same year. Infact the assessee had carried out this transaction with its group company in the larger interest of retail shareholders by ensuring that there is no dilution/reduction of wealth maximization in the hands of retail shareholders. Considering the totality of the facts and circumstances of the case and viewing it from a holistic angle, we do not find any infirmity in the said basis of determination of market price of shares by the assessee. Moreover, the revenue in the instant case had sought to adopt the fair market value of shares in respect of impugned sale transaction. Though the revenue is permitted to do so, it should first find defects in the workings adopted by the assessee, reject the same and thereafter proceed to determine the fair market value. We find that the entire issue has been addressed by the revenue with utmost suspicion by trying to treat the part of the sale transaction as ingenuine and sham as the transaction had happened between group companies, which is totally unsustainable in the eyes of law.
In view of the aforesaid observations, we hold that the lower authorities erred in disallowing the long term capital loss of Rs 11,04, 54,306/- and the ld. AO is hereby directed to allow the same and further allow it to be carried forward to subsequent years. Accordingly, the Ground No. 3 raised by the assessee is allowed.
The Ground Nos. 1 & 4 raised by the assessee are general in nature and does not require any specific adjudication.
In the result, the appeal of the assessee is allowed.