DCIT CENT. CIR. - 13, MUMBAI vs. M/S. LOTUS INVESTMENTS LTD., MUMBAI

O R D E R Per P K Bansal, Vice-President:

These cross appeals have been filed against the order of the CIT(A) dated 28.02.2005, for A.Y. 1998-99. The assessee has taken following grounds of appeal:

“1.(A) On the facts and in the circumstances of the case and in law, the learned Commissioner of Income Tax (Appeals) erred in confirming the disallowance of proportionate interest on the advances to Albarka Finance House Ltd; Neptune Enterprises, Siddhivinayak Creations and Vishesh Films and the reasons

2 M/s. Lotus Investment Ltd. assigned for doing so are wrong and contrary to the facts o the case and the provisions of the Act and Rules made thereunder.

1.(B) On the facts and in the circumstances of the case and in law, the learned Commissioner of Income Tax (Appeals) erred in not appreciating that the advances to the aforesaid parties were given for acquisition of satellite and overseas rights of films and serials in the normal course of business activities and hence no interest was chargeable on these advances in the absence of any agreement for charging the interest.

2.(A) On the facts and in the circumstances of the case and m law, the learned Commissioner of Income Tax (Appeals) erred in confirming the disallowance of proportionate interest on the advances of Rs. 1,50,00,000/-- to Lexicon Finance P. Ltd, and the reasons assigned for doing so are wrong and contrary to the facts and the provisions of the Act and Rules made thereunder.

(B) On the facts and in the circumstances of the case and in law, the learned Commissioner of Income Tax (Appeals) erred in rejecting the additional evidence being the confirmation letter from Reliance Silicones (India) Ltd; to' the effect that they had borrowed funds from Lexicon Finance P. Ltd. against the guarantee and pledge of shares of IPCA Laboratories Ltd. belonging to the appellant and the reasons assigned by him for doing so are wrong and" contrary to the provisions of the Act and Rules made thereunder.

(C) On the facts and in the circumstances of the case and in law, the learned Commissioner of Income Tax (Appeals) ought to have accepted the confirmation letter from Reliance Silicones (India) Ltd; as the confirmation letter does not constitute new "additional evidence" but only clarificatory or supporting ones and thus admissible even under Rule 46A(b)/(c) read with section 250(4)7(5) of the Act, to enable him to dispose off the appeal based on real facts which could have been verified at assessment stage or remand stage had the summons been issued. Reliance is placed on judicial decisions in, (i) Smt. Prabhavati S. Shah v. CIT, 231 ITR 1 (Bom.) (ii) Shri Shankar Khandsari Sugar Mills, 193 ITR 669 (Karn.) (iii) New Manas Tea Estates P. Ltd., 73 ITD 157 (Gauhati) (iv) Dwarka Prasad, 63 ITD 1 (Patna T.M.) &(v) Nathasingh vs. Financial Commissioner AIR 1976 S.C.

3 M/s. Lotus Investment Ltd.

3.(A) On the facts and in the circumstances of the case and in law, the learned Commissioner of Income Tax (Appeals) erred in confirming the disallowance of proportionate interest on the advances to Mr. Amitabh Bachchan holding that the same is not for the purpose of business and the reasons assigned for doing so are wrong and contrary to the facts and the provisions of the Act and Rules made thereunder.

3.(B) On the facts and in the circumstances of the case and in law, the learned Commissioner of Income Tax (Appeals) erred in not appreciating that the account of Mr. Amitabh Bachchan is a running account having sometimes credit balance and sometimes debit balance without any stipulation or agreement as to charging of interest and hence cannot be considered for disallowance of proportionate interest.

4(A) On the facts and in the circumstances of the case and in law, the learned Commissioner of Income Tax (Appeals) erred in confirming the disallowance of proportionate interest on the advances to M/s. East West Travels & Tours and the reasons assigned for doing so are wrong and contrary to the facts and the provisions of the Act and Rules made thereunder.

4.(B) On the facts and in the circumstances of the case and in law, the learned Commissioner of Income Tax (Appeals) erred in not appreciating that the advance given to East West Travels & Tours was to get facility of getting travel tickets for the business purposes and there was no stipulation or agreement for charging of interest on the advance.

5.(A) On the facts and in the circumstances of the case and in law, the learned Commissioner of Income Tax (Appeals) erred in confirming the disallowance of proportionate interest on the amount paid for share application/ subscription. to GMR Group of Companies holding that the same were not business transactions and the reasons assigned for doing so are wrong and contrary to the facts and the provisions of the Act and Rules made thereunder.

5.(B) On the facts and in the circumstances of the case and in law, the learned Commissioner of Income Tax (Appeals) erred in not appreciating that 4 M/s. Lotus Investment Ltd.

(i) the advances were given in the normal course of business activity of investments in shares. (ii) confirmation letters from the concerned companies giving the details of share application money and refunds of share application money were furnished.

(iii) the fact that the payments were made towards subscription for shares was confirmed and corroborated by Director/Executive of GMR Vasavi Group confirming the statement of Mr. Stany Saldhana, dated 22.10.98, with regard to nature of transaction as witness produced by them.

(iv) no interest can be charged on share application money.

Without prejudice to the above grounds of appeal;

6(A) On the facts and in the circumstances of the case and in law, the learned Commissioner of Income Tax (Appeals) erred in confirming the disallowance of proportionate interest of Rs. 1,03,54,526/- on the advances to various parties by rejecting the alternative plea of the appellant that in absence of nexus, the utilization of borrowed funds in interest free advances (assets) should be treated as proportionate to total assets and not to the borrowed funds as taken by the learned Assessing Officer and the reasons assigned for rejecting the same are wrong and contrary to the provisions of the Act and Rules made thereunder.

6(B) On the facts and in the circumstances of the case and in law the learned Commissioner of Income Tax (Appeals) erred in holding that the alternate contentions of the appellant are additional evidences and in rejecting the same which is wrong and contrary to the provisions of the Income Tax Act, 1961 and rules made thereunder.

The appellant craves leave to add, alter, amend and/or modify all or any of the above grounds of appeal on or before the date of hearing.”

5 M/s. Lotus Investment Ltd.

The revenue in its appeal has taken the following effective grounds:

“1. On the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in holding that the transaction leading to capital loss of Rs.35,64,00,000/- on sale of shares of M/s. Reliance Silicon India Ltd. was genuine and not a colourable device and thus deleing the disallowance of Rs.35,64,00,000/- 2. On the facts and in the circumstances of the case and in law, the ld. CIT(A) has erred in allowing deduction of proportionate amount of interest on amount advanced to Anand Exports (15 lacs) C.A Corp. (Rs.25 lacs), Galaxy Expor (25 lacs) and Amitabh Bachchan Corp. Ltd. (Rs.1,10,50,589/-) from the total income without appreciating the fact that the assessee was not able to produce any evidence either before the AO or the CIT(A), to show the amounts were advanced for business purposes.

3. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the disallowance of interest of Rs.29,29,709/- without appreciating that interest bearing funds were advanced to M/s. Reliance Silicon India Ltd. as interest free loans.

4. The appellant craves t leave to add, to amend and/or to alter any of the grounds of appeal, if need be.”

2. Ground no.1 in assessee’s appeal relate to sustenance of disallowance of proportionate interest on the advances made by the assessee to Albarka Finance House Ltd., Neptune Enterprises, Siddhivinayak Creations and Vishesh Films. Facts relating to this ground are that the AO noted that the assessee had taken huge unsecured loans on interest and the same have been advanced to various other concerns and parties without charging any interest and without having any business purpose. Therefore, he issued notice to the assessee. The assessee submitted that it has made the 6 M/s. Lotus Investment Ltd.

advances to the following companies on account of acquisition of the satellite and overseas rights of the films and serials produced by them and, therefore, no interest have been charged:-

Sr.No. Name of the Party Amount (Rs.) 1 Anand Exports 1,50,000 2 Albaraka Finance House Ltd. 1,545,000 3 C.A. Corporation 2,500,000 4 Galaxy Exports 2,500,000 5 Neptune Enterprises 2,500,000 6 Siddhivinayak Creations 425,000 7 Vishesh Films 50,000 11,020,000 He further submitted that the assessee is engaged in the exporting of the films in earlier years. The Assessing Officer did not agree with the assessee.

The Assessing Officer noted that the assessee has made interest free advances to the following companies also without any business purpose.

Sr. No. Name of the Party Amount (Rs.) 1 East West Travels & Tours 850,000 2 Lexicon Finance (P) Ltd. 15,000,000 3 Amitabh Bachchan Corporation Ltd. 11,050,589 4 Shri Amitabh Bachchan 814,459 5 Pashupati (P) Ltd 12,000,000 6 Cosmos Communications (P) Ltd. 6,000,000 7 Aminex Communication (P) Ltd 2,500,000 8 Welford A P Ltd 7,000,000 9 Wonil Toys (P) Ltd. 1,000,000 10 Gammon India Ltd. 3,060,000 59,275,048 The assessee submitted that the advances given to Pashupati Artex (P) Ltd., Aminex Communication (P) Ltd., Welford A P Ltd., and Wonil Toys P Ltd. were for allotment of shares. They are not pursuing their investment and 7 M/s. Lotus Investment Ltd. wanted to take back their money. Therefore, these advances are pending.

Since the advances are in the nature of investment in shares or application for allotment of shares, therefore, no interest can be charged. In respect of Amitabh Bachchan Corporation Ltd., the assessee has stated that this company had incurred heavy losses in A.Ys 1996-97 to 1998-99 and ultimately declared sick by BIFR. Therefore, no interest can be charged. In respect of advances given to Amitabh Bachchan and East West Travels, the assessee stated that both the accounts were current account with the company and, therefore, sometimes there is credit balance and sometimes there is a debit balance. Hence, no interest was charged. The Assessing Officer took the view that the assessee had diverted interest bearing funds for non-business purposes and, therefore, computed proportionate interest on the funds so diverted and disallowed the same. He calculated the advances given to all these parties at ` 6,72,35,048/- and the interest paid at `2,10,05,537/- and thus worked out the disallowance at `1,40,12,034/-.

Aggrieved, the assessee went in appeal before the CIT(A).

8 M/s. Lotus Investment Ltd. upheld the disallowances on the advances to Albarka Finance House Ltd., Neptune Enterprises, Siddhivinayak Creations and Vishesh Films.

“10. The next advance on which interest has been disallowed is relating to M/s. Albaraka Finance House Ltd. The assessee failed to file any confirmation from this party. It has simply disclosed the address of this concern and filed an affidavit pointing out that advance was given for business purposes. On due consideration of the finding of the ld. Revenue authorities below we are of the view that assessee failed to discharge the onus put upon it. It was the duty of the assessee to demonstrate that advance was given for the purpose of the business. It failed to establish the nexus between the advance and the object of the business ought to have been achieved by the assessee. Therefore, we confirm the disallowance of interest on this advance.

11. The next loans advanced by the assessee are in respect of M/s. Siddhivinayak Creations and Neptune Enterprises. It is seen that these are the old advances and in the past no disallowance of interest was made on these advances. It suggests that in the past department has accepted the fact that advances were given for the purpose of business. At the time of hearing it was also pointed out that in respect of Siddhivinayak even in the subsequent year no disallowance has been made. In view of the above facts we delete the disallowance of interest in respect of these amounts.”

9 M/s. Lotus Investment Ltd.

Respectfully, following the order of this Tribunal for A.Y. 1997-98, we confirm the disallowance relating to Albarka Finance House Ltd. and delete the disallowances pertaining to Siddhivinayak Creations and Neptune Enterprises.

We, therefore, delete the disallowance made in respect of interest on the advances made to Vishesh Films.

Thus, ground no.1 taken by the assessee is partly allowed.

10 M/s. Lotus Investment Ltd.

“After going through the order of A.O. as well as of ld. CIT(A) we are of the view that the facts are not quite clear whether advances were given for the business purposes or not, therefore, we set

11 M/s. Lotus Investment Ltd. aside this issue to the file of A.O. for re adjudication in accordance with the latest decision of Hon’ble Supreme Court reported in 288 ITR Pg.1 rendered in the case of S A Builders vs. CIT.” The learned AR before us even though tried to distinguish the fact that in A.Y. 1997-98, the CIT(A) confirmed the disallowance on the ground that the assessee could not produce any evidence to show that Lexicon Finance (P)

Ltd., was indeed going to initiate liquidation proceedings against RSIL. In the impugned assessment year, the assessee has filed confirmation from RSIL dated 23.11.2004 that they had borrowed a sum of `1,50,00,000/- against the guarantee of the assessee and pledge of shares of IPCA Laboratories held by the assessee. The assessee company had to release the shares of IPCA Laboratories which were pledged and to avoid the loss, which could have been caused due to sale of those shares by Lexicon Finance Limited to recover the money. On this basis, it was contended that advance was given by the assessee to Lexicon Finance Limited for the purpose of business but since in the preceding assessment year this issue has been restored to the file of the Assessing Officer for re-adjudication in accordance with the decision of Hon’ble Supreme Court in the case of S.A.Builders (supra), we therefore, set aside the order of the CIT(A) on this issue with the direction that the Assessing Officer shall verify the confirmation submitted by the assessee from RSIL and in case the Assessing Officer is satisfied with the confirmation filed by the assessee as genuine, the addition so made be deleted.

12 M/s. Lotus Investment Ltd.

Thus, ground no.2 is allowed for statistical purposes.

After hearing the rival submissions and going through the orders of the tax authorities below, with similar disallowances made in A.Y. 1997-98 was deleted by the CIT(A) and when the matter came before this Tribunal in for A.Y. 1997-98, this Tribunal vide its order dated 16.03.2007, deleted the said disallowance as per the observation given in para 7 therein. The learned DR have though vehemently relied upon the order of the Assessing Officer could not address any cogent material or evidence before us which may compel us to take a view different from the one, which has been taken by this Tribunal. We, therefore, respectfully following the order of this Tribunal for A.Y. 1997-98 delete the proportionate disallowance out of the interest in respect of the money advanced by the assessee company to Mr. Amitabh Bachchan amounting to ` 8,14,459/-.

Thus, ground no.3 taken by the assessee is allowed.

13 M/s. Lotus Investment Ltd.

Ltd. The facts relating to the disallowance are that the Assessing Officer noted that the assessee had made advances to Gammon India Ltd. and the balances outstanding was `.30,60,000/-. He was of the view that the borrowed funds have been advanced and, therefore, disallowed proportionate interest on the amount advanced to Gammon India Ltd. The assessee has submitted before the Assessing Officer that upto 30.03.1998, assessee company was earning credit balance of Gammon India. However, on 31.03.1998, assessee company has given a cheque of `.50,00,000/- to Gammon India and therefore the balance against Gammon India has become debit. The amount was given on the last day of the accounting year therefore no interest has been charged. The Assessing Officer did not agree.

In the absence of any evidence being filed, he was of the view that the amount was given in the year 1995-96 and the same is still pending and, therefore, made proportionate disallowance of interest in respect of amount advanced to Gammon India Ltd. The assessee went in appeal before the CIT(A).

During the course of hearing before the CIT(A) paper books containing confirmation letters from GMR /various group companies was filed, which were send to the learned Assessing Officer for remand report. The Assessing Officer has sent a remand report based on the original assessment. He has 14 M/s. Lotus Investment Ltd. not made any further inquiries. On the basis of the confirmation letter under the pretext of Rule 46 retained the same as additional evidence. The assessee has taken a plea on the basis of remand proceedings reproduced at pages 225 to 239 of the paper-book. At pages 235 to 237 submitted before the CIT(A), it has been mentioned that the payment was made to GMR/Vasavi Group towards allotment of shares and this thing has been confirmed from the statement of Mr. Stany Saldhana dated 22.10.1998 with regard to the nature of transactions. The assessee has also produced copies of the letters written by GMR/Vasavi Group companies while refunding share application money as well as copies of letter from GMS/Vasavi Group. The CIT(A) confirmed the disallowance.

15 M/s. Lotus Investment Ltd.

` 11,08,82,521/- against which investment in net current assets were to the extent of ` 15,92,45,205/-. There was no secured loan outstanding during the impugned assessment year. Since the money has been given out of interest free funds belonging to the assessee and no borrowed funds were utilized , therefore, the question of disallowance of interest incurred u/s. 36(1)(iii) does not arise. The assessee has withdrawn his application for allotment of shares and, therefore, the assessee was not entitled for any interest on the amount refundable to him by Gammon India Ltd. towards share application.

Similarly, the net current assets of the assessee had increased from `14,61,14,497/ as on 31.03.1997- to `15,92,45,205/- as on 31.03.1998. In 16 M/s. Lotus Investment Ltd. this view of the fact, we do agree with the alternative plea of the assessee that it is not a case where it can be said that the borrowed funds had been utilized by the assessee for making the payment to GMR group of companies.

No cogent material or evidence has been furnished before us by the learned DR, who vehemently relied on the order of the Assessing Officer, which may prove that the assessee has borrowed funds during the impugned assessment year and used the same for making the payments to GMR Group. We, therefore, on this basis itself set aside the order of the CIT(A) and delete the addition made by disallowing the proportionate interest on the money advanced to GMR Group of Companies.

Thus, ground no.5 taken by the assessee is disallowed.

Ground no. 1 relates to the finding of the CIT(A) in respect of capital loss of `35,64,00,000/- on the sale of shares to M/s. Reliance Silicon India Ltd. as 17 M/s. Lotus Investment Ltd. genuine. The facts relating to this ground are that during the impugned assessment yea, the assessee company has sold equity shares of IPCA Laboratories for ` 45,02,27,500/- along with 15,000 shares of Maker Laboratories Ltd. for ` 1,50,000/- The assessee incurred a loss of ` 4,80,000/- on the sale of shares of Maker Laboratories Ltd. while it earned capital gain sale of shares of IPCA Laboratories Limited at ` 44,87,83,835/-.

The Assessing Officer was of the opinion that to set off the capital gain arising out of the sale of IPCA Laboratories Limited, the assessee has devised a scheme thereby it has shown investment of Reliance Silicon in 1996 and has got allotted 36 lakh shares of Reliance Silicon in August 1996. The assessee had given a loan of `21,60,00,000/- to Reliance Silicon in earlier years on interest. This loan was converted into share allotment money for allotment of 36 lakh shares. The assessee has subsequently paid a sum of `14,40,00,000/- on 30.09.1997 as balance share application money. After allocation of shares, the assessee claimed these shares were sold to Manasvi Investment (P) Ltd., at the rate of ` 1 per share. The Assessing Officer was of the view that the transaction entered into by the assessee was not a genuine transaction. The whole exercise was done with an intention to avoid tax on the capital gain in respect of the original transaction of sale of shares of IPCA Laboratories Limited held by the assessee. The assessee went in appeal before the CIT(A). The CIT(A) deleted the said addition.

18 M/s. Lotus Investment Ltd.

I have gone through -the submissions made by the Authorised Representative of the appellant vide para (xi)(c) of letter dated 20.12.2004 for admission of the additional evidences submitted during the course of appellate proceedings before my predecessors in office as well as before me. The following documents which were submitted by the appellant as additional evidences to my predecessor CIT(A) in office and the Assessing Officer and were admitted to be filed as additional evidences by my predecessor in view of the fact that my predecessor has already provided opportunity to the Assessing Officer as per Section 250(4) of the Income Tax Act, 1961 and Rule 46A of the Income Tax Rules, 1962. Hence, the same are accordingly treated as admitted as the A.Q. has also considered and perused the same.

As regards the additional evidences in the form of :- (a) certificate dated 23.11.2004 from Reliance Silicones (India) Ltd. (RSIL) regarding the amount adjusted towards the allotment of shares and call money and (b) confirmation letter dated 23.11.2004 from RSIL that the loan from Lexicon Finance Ltd. was against pledge of shares of IPCA Laboratories Ltd., the request for admission thereof as additional evidence is rejected as the same does not fall in the circumstances specified in Rule 46A. The appellant had sufficient opportunity to adduce the evidences relevant to any of their submissions before the Assessing Officer in the original assessment proceedings as well as in the remand proceedings carried out by the A.O. in response to the letter dated 29.10.2003 of my predecessor in office. These

19 M/s. Lotus Investment Ltd. could have been also produced before my predecessor-in-office when he was requested to admit other additional evidences. Having failed to produce and adduce any evidence when sufficient opportunity was available, the same cannot be admitted at this late stage.

Even in the decision of Bombay High Court in the case of Smt. Prabhavati S. Shah v. CIT 231 ITR 1, it has been held at page 7 that "on a plain reading of rule 46A, it is the right of the appellant to produce before the' Appellate Assistant Commissioner any evidence, whether oral or documentary, other than the evidence produce by him during the course of the proceedings before the Income-tax Officer, except in the circumstances set out therein."

Thus, the case of the appellant does not fall in any of the circumstances specified in Rule 46A and hence I reject the admission of additional evidences sought to be produced at (a) & (b) above before me after the aforesaid remand proceedings

I have gone through the facts with regard to acquisition and sale of shares of Reliance Silicones (India) Ltd. (RISL) along with the observations made by the Assessing Officer and the arguments of the authorized representative of the appellant in defence of allowability of long term capital loss of Rs.35,64,00,000/- on sale of shares of Reliance Silicones (India) Ltd. I have also noticed that my predecessor in office had written a letter dated 8th April, 2003 to the Assessing Officer wherein he desired the Assessing Officer to make further enquiries and on perusal of the documents available on record and keeping in view the facts and circumstances enumerated by him in the assessment order with regard to disallowance of Long term Capital Loss on sale of shares of RSIL shown by the appellant and also to comment on the alleged misleading statements pointed out by Authorised Representative (AR) of the appellant. The DCIT, Central Circle - 13 did not conduct further enquiries as has been brought to my notice in the submission made by the Appellant's authorised representative . The AO himself has stated in his Report, the followings:-

"The factual position on the basis of additional evidence furnished by the assesses is as under:

20 M/s. Lotus Investment Ltd.

1) From the case records, it is not clear whether - i) The assesses had purchased Manasvi Investments P.Ltd. ii) Shri Amitabh Bachchan had remitted Rs.31,55,100 to Manasvi Investments P.Ltd. The bank statement of Manasvi shows the entry of Rs.31,55,100 on 6.4.98 with reference number FTTI9802 but no other-details have been mentioned iii) The assessee company paid Rs.14,40,00,000/- on 30.6.97 for getting the shares of Reliance Silicon Ltd. allotted whereas the loans paid earlier had been transferred by way of journal entry.

Further, share of IPCA were sold but the consideration was not received by the assessee and the same was shown as receivable. Similarly, the shares of Reliance Silicon were sold to M/s Manasvi Investment P.Ltd but the full consideration was received only in the subsequent financial year.

2) The statement of directors was recorded by the AO on 21.3.2001 as per the order sheet entry of the same date and the position is the same as stated in your above mentioned letter.

3) I am forwarding to you the case records for your ready reference. You are also requested to kindly call the concerned AO who had passed the assessment order to throw light on the issues which are not apparent from the records, if such a need is felt".

On the face of the above comments made by the AO, it is seen that the A.O. has not been able to controvert the submissions of the appellant dated 20.12.2002 and 31.03.2003 and he did not make further enquiries for which he was given opportunity by my predecessor CIT(A) in office vide his letter dated 08.04.2003. Only by stating that it is not clear whether Manasvi Investments P. Ltd was purchased by the appellant or whether Amitabh Bachchan had remitted Rs.31,55,100/-- to Manasvi Investments P. Ltd., it cannot be concluded that the transaction of sale of shares of RSIL to Manasvi Investment (P) Ltd. was bogus or colourable device on which conclusion is drawn. The fact remains uncontroverted by the A.O. that Manasvi Investments P. Ltd. was not purchased by the appellant company and that the investment in Manasvi Investment P. Ltd. was made by the RSIL Employees Welfare Trust and not by the appellant company That the consideration for sale of shares of RSIL was received by the Appellant from Manasvi Investment (P) Ltd.. that the same is accounted for by the appellant and that Manasvi Investment (P) Ltd. is still holding the shares of RSIL as 21 M/s. Lotus Investment Ltd. can be seen from its audited balance sheet as at 31.03.2002 go to show that the transaction of sale of shares of RSIL to Manasvi Investment (P) Ltd. by the appellant as per MoU dated 23.9.1997 was an arm's length transaction.

It is also apparent from records, as stated by my predecessor in office vide para 2 of his letter dated 08.04.2003 to the A.O., that the A.O. had taken statement of Director and Shareholder of Manasvi Investments P. Ltd. before passing the assessment order who had stated that :-

(a)the shares have been transferred in the name of Manasvi Investments P. Ltd. immediately on delivery of shares and that the Company is still holding the shares of Reliance Silicones Ltd. (b)the remittances were received from Laser Capital Investments Co Ltd. of and not from Amitabh Bachchan. (c)the purchase consideration has been paid to Lotus Investments Ltd.. out of their capital and remittances. (d)the entries passed in the books of Manasvi and Reliance Employees Trust are genuine.

The said fact is also supported by the fact that the said shares arc reflected as investment in the audited Annual accounts of Manasvi Investment (P) Ltd. as on3 1.3.2002. The A.O. having failed to establish by way of making enquiries with regard to the remittance entry of Rs.31,55,100/- on 06.04.1998 with reference number ITTI 9802 in the bank statement of Manasvi Investment P, Ltd., that the remittance was received from Amitabh Bachchan and, not from Laser Capital Ltd., London, remains also uncontroverted. I have also taken note of the fact that as far as purchase of shares of RSIL is concerned, on 30lh August, 1996 the appellant Company was allotted 36,00,000 equity shares of Rs. 100/- each of RSIL against exercise of the option of conversion of loan which included the amount paid and the amount guaranteed by way of pledge of shares of IPCA Laboratories Ltd. by the appellant company. I reject admission of additional evidences in the form of letters filed from M/s Peerless General Finance & Investment Co. Ltd., DWC Finance Ltd. and Mr. Mayank Kumar through which the Appellant's authorised representative wants to prove that the loans were granted to RSIL on guarantee by way of pledge of shares of IPCA Laboratories. These papers were not before the Assessing Officer during either assessment proceedings or during remand proceedings as they have been filed before me after submission of remand report/rejoinder report. Even there is no request from Appellant to consider them as additional evidences.

22 M/s. Lotus Investment Ltd.

In absence of such request and justification for admission, the issue is decided without considering them. As regards, the adjustment of the amount of Rs.36,00,00,000/- towards the shares allotted by RSIL to the appellant by way of conversion of loan it has been stated that an amount of Rs.21,60,00,000/- was adjusted on allotment and Rs. 14,40,00,000/- being the call money was adjusted on 30.06.1997 as per the entries in the books of account on conversion of loans. I have taken note of the fact that shares were allotted by RSIL by way of adjustment of loan which was done by way of journal entries in the books of accounts of both RSIL and the Appellant. Further, with regard to conversion price and sale price of shares of RSIL. the conversion price observations of AO arc general in nature. With regard to genuineness of the. the AR has pointed out that even the allotment to the holding company of RSIL. M/s. Smay Investment Ltd. which was made on 03/4/1996 was at the rate of Rs.100/- per equity share, also taken note of the argument of appellant's AR. that as per the provisions of Companies Act, 1956 the shares could not have been allotted at discount by the company closer to break-up value, as mentioned by A.O., without the permission of the Company Law Board as per Section 79 of the Companies Act, 1956 and the other restrictions provided in that section. Further, as regards the sale price of shares of RSIL is concerned, the AR has slated that the break up value of the share was "minus" or "negative" at the relevant point of time which the AO has not pointed out any where in the assessment order. The A.R. has also contended that since the company was not a listed company the exit route was not available and hence the availability of buyers was limited. The AR has further pointed out that under these circumstances, it was not possible for the appellant to sell the shares on the Stock Exchange or in the open Market, and the only possibility was to approach the persons intimately connected with RSIL and in this was it was RSIL Employees Welfare Trust who were for obvious reasons interested in its revival and who could have purchased shares of a loss making company. It was also submitted by the AR that the appellant could not have found many buyers as RSIL was a 'Sick Company' and as such the Appellant did not have any option but to sell the shares of RSIL at a token price of Re.1/-per share to Manasvi Investment P. Ltd. enabling them to salvage Rs.36 lakhs.

It has also been contended by the AR that while disallowing the loss, the A.O. has not taken into consideration the Board Resolution of appellant Company dated 10.8.1994, which is on record, wherein it is clearly stated that the Appellant had the option to convert the loan into shares. As the financial position of RSIL deteriorated over

23 M/s. Lotus Investment Ltd. the period, the Appellant was not in a position to recover the loans from the RSIL, which had become a 'Sick Company'. Therefore, the appellant considered various options and decided to convert the loans into equity shares in terms of direction of the Board with the hope to acquire management control as per the Resolution passed by it on 07.08.1996 It has been argued that in the entire exercise, the A.O. has not brought out any material on record to prove non- genuineness of the transactions leading to sale of shares of RSIL resulting into loss of Rs.35,64,00,000/--. The A.O. having not conducted the enquiries had failed to bring material to support his case to prove colourable nature of the transaction of sale of shares of RSIL.

Further, the AR has pointed out from annual accounts of RSIL for the year ended 31.3.1993 that as on 31.03.93 the Company had Net Worth of Rs.234.26 lacs consisting of share capital of Rs.101.50 lacs and Reserves of Rs.132.76 lacs. It was only in 1992-93, that RSIL had made loss for the first time in its last 13 years. RSIL was a profit making company and for the year ended 31.3.92, it had made profit of Rs.207.70 lacs before tax and profit of Rs.100.70 lacs after tax on the share capital of Rs.101.50 lacs. However, later on RSIL started making losses on account of dumping of finished goods by the multinational companies and no protection was given to the local industry by the Government of India, which was expected by levying anti-dumping duties, or by reducing import duty on raw materials for making the local units competitive and viable. It was submitted by the AR that as the company was hopeful that the Government would levy anti-dumping duties and/or reduce import duty on raw materials which would make local silicon industries viable and profitable, the appellant gave loans to RSIL in its ordinary course of business with an option to convert the same in the equity shares. However, subsequently as the losses went on mounting arid RSIL became a 'Sick Company', the Board of Directors of the appellant company deliberated upon various options available to it. The Board vide resolution dated 07.08.1996 decided to convert the loan in to equity shares as per the option available to the company with the sole objective of taking over the management control as the paid up capital of RSIL was only Rs.1,01,50,000/- at the relevant time.

It was also pointed out by the AR that the company had various assets including immovable properties being leasehold land, freehold land, Research building, factory building, Administrative building, Residential building as appearing on audited balance sheet

24 M/s. Lotus Investment Ltd. as at 31.03.1996 and that the market value of these properties was substantial. It was expected by the appellant that on conversion of the loan into equity shares of Rs.36 crores, its shareholding in RSIL would be 97.27% and would get full management control of RSIL which would have benefited the appellant under the circumstances prevailing at that point of time It was further submitted by AR that the appellant did not come to know upto 30.08.96, that the existing management of RSIL had already issued and allotted fresh 36 crore equity shares on 03.04.1996 to Smay Investment Ltd. in lieu of transfer of technology to RSIL which was kept totally secret from the appellant company - which the appellant came to know only after RSIL allotted the shares to them. It has been submitted by the AR that it was a breach of trust and fraudulent act on the part of the management of RSIL while dealing with the Appellant company. Under the circumstances, it has been stated that the share holding of Lotus Investments Ltd., the appellant company came down to only 9.80% of the total paid up capital of RSIL as against the majority share holding of 97.27% expected by the appellant. It has been further stated by AR that the management of the appellant company, though was of the view that the action of allotment of shares to Smay Investment Ltd. by RSIL was fraudulent, it did not really had legal remedy since on the date of allotment of shares to Smay Investment Ltd., the appellant was not a shareholder and hence it could not have objected to or challenged the allotment. Thus, it has been submitted that the appellant company could not succeed in acquiring the management control of RSIL. In view of these developments, the appellant company finally at its Board Meeting held on 16th September, 1997 made up its mind to disassociate with RSIL and decided to sell the shares of RSIL. Accordingly, it finalized terms of sale of shares of RSIL as per MoU dated 23.09.1997 with M/s. Manasvi Investments Pvt. Ltd. for sale of shares of RSIL at Re.17- per share. From perusal of above facts, in my opinion, speak volumes on the events and transactions.

Further, it has been contended by AR that the observations made by the AO that the Appellant Company had engineered the method of adjusting long term capital gain on the sale of shares of IPCA Laboratories Ltd. against the long term Capital loss on the sale of shares of RSIL is not substantiated and is not borne out of the materials on record as the decision for concerting loan into shares of RSIL was taken by the Board vide Resolution dated 07.08.96 which is much before the decision for sale of shares of IPCA Laboratories Ltd.

25 M/s. Lotus Investment Ltd.

"as per the Agreement dated 14/5/1997. The AR has also pointed out that in the cases of loans raised by way of pledging the shares of IPCA Labs Ltd. the repayments of loans to the creditors were made in most of the cases directly by the buyers of shares of IPCA Lab. Ltd. as per Agreement dated 14/5/1997. I find merit in the contention of AR that all these facts go to show that the transactions have taken place from time to time in normal course of business being arm's length transactions and not colourable devices being part of tax planning measures adopted by the Appellant company.

The A.O. has also observed that the transfer of management of IPCA Labs had taken place in 1996-97 and therefore, as per the trade practice, even the shares of IPCA held by the appellant Company should have been sold in the financial year 1996-97. He has also observed that envisaging the magnitude of the capital gain and the consequent capital gains tax liability, it deferred the sale of shares of IPCA to the Financial Year 1997-98.

The A.R., in defence, has stated that there is no such trade practice that the shares should be sold immediately on change of management. The decision to sell or to hold the shares would be different in different cases depending on the circumstances of each case and Mr. Ajitabh Bachchan continues and continued to be Chairman of IPCA Laboratories Ltd. This fact is also taken note of.

The A.R. has stated that the family members of Mr. Amitabh Bachchan did sell the shares of IPCA Labs in December 1996 at the throwaway price of Rs. 96/-per share (on average rate) which was done with a view to pay off the pressing creditors who would have otherwise dragged the family of Mr. Amitabh Bachchan into litigation and would have tarnished the public image of the family. However, Mr. Ajitabh Bachchan did not sell his shares as alleged by A.O The shares in IPCA Laboratories held by the individual members of the family were to the extent of approx. 10 lacs shares out of the total of 45 lacs shares held by the group. Thus small lots of the shares was sold to overcome financial crisis of the family. Later the other shares were sold to the management of IPCA group at market price averaging to Rs.141/- per share vide the agreement for sale dated 14.05.1997 entered into by and between management of IPCA-Laboratories and Lotus Investments Ltd. It has been submitted highlighting that had the Appellant sold the shares of IPCA Lab. Ltd. in the financial year 1996-97, the prices

26 M/s. Lotus Investment Ltd. would have been 2/3rd of the amount at which they have sold the shares in the financial year 1997-98 vide agreement dated 14.5.1997 It is submitted that it turned out to be a wise and prudent decision on the part of the Appellant to sell the shares in the financial year 1997-98 instead of in the financial year 1996-97. This way the appellant could realize higher amount capital gains of about Rs.15,35,52,000/- resulting in higher long term capital gains which the AO has not recognized and realized. It was a case of compulsions and not a tax planning. It is therefore, submitted that on these facts the observations made by AO that sale of shares of IPCA Laboratories Ltd. were deferred to the next year cannot be appreciated. It was also argued by the A.R that most of the observations made in the assessment order by the A.O. are based on guess work, presumptions, imagination and surmises with the sole objective of disallowing the loss suffered by the Appellant on sale of RSIL shares without proving anything contrary to the facts.

In the absence of further enquiries done by the A.O. in view of my predecessor's letter dated 08.04.2003 and from the materials placed on the record, I find that there is a force in the contentions of the appellant that the decisions taken by them relating to conversion of loan into Equity Shares and subsequent sale thereof, were transactions at arm's length and not a colourable device. The AO should have conducted further enquiries and brought materials on record to support his case that Sri Ajitabh Bachchan had remitted the amount of Rs.31,55,100/-- through remittance reference number FTTI 9802 OR in alternative he was interested and instrumental in getting this amount remitted by M/s. Laser Capital Ltd. London, OR else Sri Ajitabh Bachchan had close connection with Mr. Greg Egen and Ms. Caroline Egen.

As regards the contention of the Assessing Officer that the transaction of sale of shares of RSIL is a colourable device and hence ingenuine to avoid payment of .capital gains tax, it has been submitted by the appellant that even assuming that there would have been no conversion of loan into shares and no long term capital loss would have arisen on sale of RSIL shares, there would have not been any loss to the appellant by way of additional tax liability on the appellant for the following reasons:

27 M/s. Lotus Investment Ltd.

To substantiate the bonafides, the authorised representative has submitted that assuming that the conversion of loan into shares of RSIL would not have taken place and no loss would have arisen on sale of those shares under the head "Capital Gains", the amount of loan advanced would have been written off as “Bad Debt", which would have been in the nature of "Business loss". The write off of such loan for a company engaged in the business of financing is allowable as bad debt u/s. 36(1)(vii) r.w.s. 36(2) of the Act. In the books of account what is debited as loss on sale of shares would have been categorized as "Bad Debts" As the learned Assessing Officer himself has observed in para No.3.1 (1)(b) on page 3 of assessment order that RSIL was declared a sick company by BIFR, it was submitted that the same would have resulted in “Bad Debts” allowable u/s. 36(1)(vii) r.w.s. 36(2) of the Act.

Therefore, it was submitted that the entire amount would have resulted in Business loss which could have been set off against the "Long Term Capital Gains" of the same year u/s.71(2) of the Act. As a result there would have been no impact on tax liability but in that process the appellant would have lost a sum of Rs 36 Lacs which it got realized by way of sale of RSIL shares. The above argument is also taken note of.

In view of the position as is reflected by discussion made above, there is a force in the contention of the appellant that the basis of the entire discussion by the Assessing Officer that the conversion of loan into shares and sale of the shares at loss resulted in avoidance of payment of tax on long term capital gains does not survive and the question of application of the decision in McDowell's case by treating transaction as colourable is not justified. Thus, the presumption of the Assessing Officer that the whole exercise of conversion of loan into shares and sale of shares have been done with the intention to avoid tax on long term capital gain in respect of sale of shares of IPCA Laboratories is not considered well founded and adverse view cannot be taken of transactions taken place between unrelated parties (not being sister concerns).

It has been contended by the appellant that the decision in McDowell's case cannot be applied in cases of genuine, legal and arm's length business transactions entered into in the normal course of business even when the same results in loss due to unfortunate developments or business decisions which turn out to be wrong in the unforeseen circumstances unless it is proved beyond doubts by the A.O. that the transaction was preconceived with dubious method with an intention to defraud revenue, which 28 M/s. Lotus Investment Ltd. does not exist in Appellant's case. The transactions had been entered into by the appellant at arms length with Manasvi Investment (P) Ltd. which is not a related party. It is incorrect to state that Manasvi Investment P. Ltd. was purchased by the appellant company. The fact is that the ownership of the said company belongs to RSIL employees welfare trust who were interested in revival of RSIL. It is stated that in August, 1994 when the appellant started advancing the loan to RSIL with option to convert the same in shares, it could not have been visualized in 1994 that the appellant would earn such a huge capital gain on sale of shares of IPCA Labs in year 1997-98. Therefore, advancing of loans to RSIL in the year 1994 can be stated to be pre conceived with a view to set off the loss against long term capital gain which arose on sale of shares of IPCA Labs Ltd. in financial year 1997-98.

The appellant has also brought to my notice various decisions which have been pronounced subsequent to the McDowell’s case, wherein the interpretation of various parameters as enunciated in McDowell's case for checking on colourable devices, have been considered.

(a) CIT V. Aspinwall and Co. (Tranvancore Ltd.), 212 ITR 525 (Ken). (b) CIT V. Dhawan Investment and Trading Co. Ltd., 238 ITR 486 (Cal.) (c) Banyan and Berry V. CIT, 222 ITR 831 (Guj.) (d) Valbhappan (M.V.) V. I.T.O., 170 ITR 238 (Mad.)

The AR also stated that the McDowell's case has also been explained and distinguished by the Supreme Court in the case of Azadi Bachao Aandolan.-263 ITR 706.

It has therefore been contended that considering the totality of the facts and circumstances, the ratio of Supreme Court decision in McDowell's case (154 ITR 148) and other cases cited in the assessment order are not applicable to the present case.

Taking into consideration the observations made by the AO, the facts brought out by appellant in defence, the remand report submitted by the A.O. in response to the directions of my predecessor CIT(A) in the office as well as in response to the rejoinder to the remand report, and the failure of the A.O. to controvert the submissions of the appellant and the fact that none of the parties to the transactions viz. Manasvi Investment P. Ltd. or 29 M/s. Lotus Investment Ltd.

RSIL are related to the appellant, it cannot be said that the appellant has used colourable device to avoid tax as observed by the AO.

I have gone through the decision of the Supreme Court in the case of Azadi Bachao Aandolan - 263 ITR 706. As the Hon'ble Supreme Court has held that there has been no drastic change in fiscal jurisprudence in India as would entail a departure despite the hiccups of Me Dowell's case, the law remains the same the transactions cannot be said to be ingenuine as these transactions are validly into and cannot be treated as non-est in the facts and circumstances of Appellant’s case.

Having gone through plethora of facts of Appellant's case and taking into account the time frame in which transactions were entered into with the third parties and that the directors of the appellant were not related to directors/shareholders of either RSIL or of Manasvi Investment Pvt. Ltd., or directors/ share holders of either RSIL or MIPL not being direct share holders of the Appellant company, I am of the view that the transactions whichever have been entered into by the Appellants cannot be categorized as non est and hence, I do not approve of the conclusion arrived at by the A.O. Thus, the appeal is allowed on this ground of appeal.

The learned DR even though vehemently relied on the order of the Assessing Officer as well as the observations made by the Assessing Officer that the assessee has sold the shares to Manasvi Investments Pvt. Ltd., just to claim the set off of capital gain which it has earned on the sale of share of IPCA Laboratories Ltd., but could not produce any material, which may prove that the Revenue has discharged the onus that the transaction entered into by the assessee for sale of the shares of Manasvi Investments Pvt. Ltd. is not genuine. It is not a case that the assessee has purchased the shares from Reliance Silicon initially by way of journal entry but the fact is that the loans advanced earlier by the assessee were converted into share capital and the 30 M/s. Lotus Investment Ltd. assessee has made the balance payment on 30.06.1997 amounting to ` 14,40,00,000/-. In our opinion, no interference is called for in the order of the CIT(A). We endorse the finding of the CIT(A) and according confirm his order on this issue.

Ground no.1 of the Revenue is accordingly dismissed.

“4. On appeal ld. CIT(A) has granted partial relief to the assessee. She has also deleted the disallowance of interest, which has been impugned by the Department in its appeal. The ground of appeal taken by the revenue reads as under: The ld. CIT(A) has erred in allowing deduction of proportionate amount of interest on amount advanced to Anand Exports Rs.15,00,000/- C.A.Corporation Rs 25,00,000/-, Galaxy Exports Rs.25,00,000, Amitabh Bachchan Corporation ltd. 1,25,33,982/- and Shri Amitabh Bachchan Rs.6,29,586 from the total income without appreciating the fact that the assessee was not able to produce any 31 M/s. Lotus Investment Ltd. evidence either before the A.O or the CIT(A) to show that the amounts were advanced for business purposes.

5. First we take up the issue regarding disallowance of interest. On perusal of the record it revealed that assessee has given advances without charging any interest to the following entities 1. Anand Exports Rs. 15,00,000/- 2. Albarka Finance House Ltd. Rs. 8,00,000/- 3. C A Corporation Rs . 25,00,000/- 4. Galaxy Corporation Rs. 25,00,000/- 5. Neptune Enterprises Rs. 25,00,000/- 6. Siddhivinayak Creations Rs. 4,25,000/- 7. East West Travels & Tours Rs. 8,50,000/- 8. Lexicon Finance (P) Ltd. Rs.1,50,00,000/- 9. Amitabh Bachchan Corp. Ltd. Rs.1,25,00,000/- 10. Shri Amitabh Bachchan Rs. 6,29,586/- The amounts advanced to at Sl.No.1 to 6 supra were alleged to have been advance for acquisition of satellite and overseas rights of films and serial produced by these entities. The ld. A.O. has disallowed the interest on such advances on the ground that assessee is not in the business of acquisition and distribution of the films. According to him assessee is engaged in the business of investment and finance. Similarly with regard to entities mentioned at sl. No.7 to 10 the A.O has observed that the loans were given for non business purposes and these loans were given out of interest bearing funds.

6. The ld. CIT(A) while re-appreciating the controversy recorded a finding that as far as loans were given to Amitabh Bachchan Corporation is concerned assessee is having a current running account. This issue was arose in AY 1995-96, wherein a sum of `.1,37,00,000/- was standing against this entity and the A.O. has made the disallowance of interest on such advance. The ld CIT(A) deleted the disallowance of interest. At the time of hearing it was pointed out before us that the appeal filed by the Revenue in 32 M/s. Lotus Investment Ltd.

A Y 1995-96 has been dismissed by the Tribunal. In view of the above we do not find any error in the finding of the CIT(A) with regard to deletion of disallowance of interest relating to the loan of `.1,25,33,982/- given to Amitabh Bachchan Corporation. Similarly ld. CIT(A) while appreciating the advances given to Anand Exports, C A Corporation and Galaxy Export to the extent of `.65,00,000/- has observed that in A.Y. 1995-96 the ld. CIT(A) has held that according to Memorandum of Article of Association the assessee was engaged in purchasing, selling and distribution of Satellite rights etc. Since the advances were given for the purpose of acquiring satellite and overseas right of films and serials, which is one of the business activity of the assessee, there should not be any disallowance of interest expenses relating to the advances given to these three concerns.

7. The ld. CIT(A) while appreciating the advances given to Shri Amitabh Bachchan has observed that Shri Amitabh Bachchan was having a credit balance till last day. He was also having a running account. The debit balance was only for one day and due to this reason the ld. CIT(A), deleted the disallowance of interest on advances appearing against the name of Shri Amitabh Bachchan on the last day. In view of this finding, we do not find any error in the order of ld. CIT(A). Thus, appeal of the Revenue is rejected.” Respectfully, following the decision of the Tribunal in the case of the assessee for A.Y. 1997-98, we dismiss ground no.2 taken by the Revenue and delete the disallowance.

The facts relating to this ground are that, the Assessing Officer during the course of assessment proceedings noticed assessee had given loan of `.1,62,76,162/- to the Reliance Silicon. When enquired, the assessee submitted that it had acquired shares of Reliance Silicon in F Y 1996-97 and had also stood as guarantor for the loans and advanced arranged for Reliance Silicon from various parties and pledged shares of IPCA Laboratories held by 33 M/s. Lotus Investment Ltd. the assessee. Since the assessee sold the share holdings in IPCA Laboratories, these shares had to be released from the creditors. The assessee therefore made the payment of RSIL. Since RSIL is a BIFR company, therefore no provision for interest has been made. The Assessing Officer was not satisfied with the explanation of the assessee as he was of the view that money has been transferred to Reliance Silicon by way of journal voucher for the purchase of Reliance Silicon Shares. The Assessing Officer therefore estimated interest @18% and disallowed a sum of `29,29,709/-.

34 M/s. Lotus Investment Ltd.

“I have considered the observations of the A.O and the above contentions of the AR with regard to the interest disallowance on advances to RSIL. It is clear that the debit balance of the party has arisen due to advances given and the payments made to other parties who had advanced the loans against the guarantee given by the appellant or pledge of shares of IPCA Labs Ltd. These amounts of loans were converted into 36,00,000 equity shares of the Company RSIL as per the option available to the appellant and the balance of aforesaid payments remained as debit balance. These transactions took place during the course of its business. It was also brought to my notice that in the Assessemnt order U/s. 143(3) dated 31.3.2000 for A.Y. 1997-98, wherein the explanation given by Mr. Stany Saldanha vide letter dated 29.3.2000 stating the facts that the advances to RSIL were given on account of allotment of RSIL shares to the company were accepted by the Assessing Officer himself and accordingly no interest was disallowed on the said advances. This fact is also taken note of considering the totality of circumstances and also the fact that the Company is registered as Sick Company with BIFR. Disallowance of interest on account of said advances is deleted.”

Order pronounced in the open court on 30th day of May, 2017.