ASST CIT 8(1)(1), MUMBAI vs. RELIANCE NATURAL RESOURCES LTD, NAVI MUMBAI

Per D.T. Garasia, Judicial Member:

4. Originally the assessment order was passed u/s.143(3) dated 07.12.2009 which is on page 14 to 27 of the paper book. The assessment proceedings were completed on 07.12.2009 and in the said assessment order, four additions / disallowances were made which read as under:

FCCB issue expenses 28,58,28,246 Legal and professional fees 49,74,139 Disallowance u/s. 14A 5,97,63,000 Withholding tax on FCCB interest 3,35,70,044 Against the above addition / disallowance, the assessee has filed the appeal before the Ld. CIT(A) and the Ld. CIT(A) has granted the partial relief which 3 ITA No.1076/M/2016 M/s. Reliance Natural Resources Ltd. included FCCB issue expenses treating same as revenue expenses. Against the said order, the assessee as well as revenue has filed appeal before the Tribunal and the Tribunal has granted partial relief to the assessee and dismissed the revenue appeal.

5. The AO has issued the notice dated 08.02.2013 under section 148 for reopening the assessment order. The assessee has filed the return of income in response to notice under section 148. The assessment was reopened on following grounds .

1. Source of investment in FCCB of Rs.1304.10 crores.

2. Allowability of FCCB interest of Rs.33,16,93,100 in view of diversion of proceeds of FCCB for non business purpose.

3. Allowability of FCCB expenses of Rs.28,58,28,246/- in view of diversions of proceeds of FCCB for non business purpose.

4. Income arising out of investment in Yield Management Certificate (YMC) and non reflection of losses of US$ .06 millions in final accounts and return for A.Y. 2007-08.

6. The assessee has objected to reopening of the assessment and requested AO to provide the following documents: a) Report of DIT (Intelligence) dated 19.11.2010 in respect of investigation carried out by them. b) Investigation carried out by SEBI on receipt of information from Financial Services, UK.

The copy of the letter is in the paper book page 82 to 107.

The AO did not provide the said documents. He passed the re-assessment order under section 143(3) read with section 147 of the Act on 27.3.2014 in which following additions/disallowances were made:

Rs. FCCB proceeds – USD 300 million 1304,10,00,000 FCCB issue expenses 28,58,28,246 FCCB interest (including withholding tax of 33,16,93,100 Rs.3,35,70,044)

7. The facts relating to issue of FCCB: Assessee has raised the fund by way of FCCB during F.Y. 2006-07 vide offering circular dated 12.10.2006 issued on 16.10.2006. RNRL has issued the bond to lead manager i.e. Barclays Bank PLC who agreed to subscribe and pay for the bond.Single Global Certificate (GC) for FCCB funds is issued and registered in the name of common depository Euroclear bank and Clearstream Luxemburg.The Barclays Bank PLC ("Barclays"), Lead Manager, as subscriber to aforementioned issue, signed the Subscription Agreement as per which Barclays agreed to subscribe to the FCCBs of USD 300 million proposed to be issued by RNRL. On 12.10.2006 RNRL issued Offer Document to Barclays (pg 155-337 of PB). On 16.10.2006 RNRL issued a single GC representing the aggregate principal of USD 300 million and delivered it to Deutsche Bank, Luxemburg ("the Registrar") of Euro Clear and Clear Stream ('the Exchanges") (pg 396-404 of PB). The Registrar registered the GC in the name of BT Globenet as the Nominee of Deutsche Bank, London, which was the Common Depository ("CD") of the Exchanges and released the authenticated GC to DB, London as the CD of the Exchange (pg 396-404 of PB). RNRL instructed the CD (DB London) to hold the GC on its behalf till Barclays instructed the CD to effect the payment to RNRL and thereafter to hold the GC for the account of the subscriber i.e. Barclays (pg 392 of PB).As per the Paying, Conversion and Transfer Agency Agreement dated 16.10.2006, RNRL agreed to deliver to the Registrar a duly executed GC (pg 355 of PB). RNRL instructed Barclays (i.e. the Subscriber) to make the net of fees payment of USD 290.40 million by way of subscription for the FCCBs Barclays

5 ITA No.1076/M/2016 M/s. Reliance Natural Resources Ltd. instructed the Deutsche Bank AG London (DB) to release the net proceeds of the FCCBs to the designated bank account of RNRL. The single GC for FCCB funds is issued and registered in the name of common depository for EuroClear Bank and Clearstream, Luxemberg. RNRL received the net sum of USD 290.40 million from Barclays through the DB and issued a receipt. On 15.10.2010 FCCBs of USD 300 million were transferred to Reliance Power Ltd. under the Demerger Scheme approved by the Hon'ble Bombay High Court. FCCBs of USD 100,000 were converted into shares. Reliance Power Ltd. has issued 43,860 shares to FCCB's holders during F.Y. 2010-11 (pg 485- 486 of PB). On 14.10.2011, balance FCCB of USD 299.90 million was redeemed to the FCCB's Holders. (pg 485-486 of PB).

8. The assessee’s case is that the FCCB fund is subscribed by Barclays bank and the assessee has received the fund from Barclays Bank. The assessee is not having detail of further subscribers of Barclays Bank at the time of issuance of FCCB or thereafter and assessee is not bound to keep such detail.

9. It is the case of AO that the report from Directorate of DIT (Intelligence), New Delhi was received on 19.11.2010 with regard to suspicious financial transactions carried out to overseas. The investigation carried out by SEBI wherein it was observed that FCCB proceeds had been used to invest in shares of Reliance Communication Ltd. (RCOM) through an investment vehicle, thereby circumventing the regulations of FEMA, SEBI and other regulatory norms.

10. The AO wanted to verify the source of FCCB funds is unaccounted/unexplained by following facts: i. FCCB funds of US $ 300 million were raised by RNRL on 16.10.06.

ii. Entire FCCB fund was held by one entity who was nominee of Euroclearbank, Luxembourg. iii. No details of the actual bondholders or ultimate beneficiaries have been provided by the assessee.

A. SOURCE OF INVESTMENT IN FCCB – RS.1304.10 CRS.

2. In the reasons recorded it has been stated that no inquiries were carried out with regard to the source of funds raised through FCCB. (para 3 of reasons recorded)

7 ITA No.1076/M/2016 M/s. Reliance Natural Resources Ltd. i. Letter from Barclays Bank PLC dated 16.10.2006 addressed to Deutsche Bank AG, London authorizing them to make payment to us against the delivery of Global Certificate. ii. Confirmation dated 16.10.2006 from Deutsche Bank London to us and to Barclays Bank PLC confirming the payment mode by them to Barclays Bank. iii. Letter dated 16.10.2006 from Deutsche Bank AG, London as common depository acknowledging the receipt of Global Certificate. iv. Letter dated 16.10.2006 from Deutsche Bank Luxembourg SA as Registrar for receipt of Global Certificate representing USD 290.40 million. Above documents are enclosed as Annexure B to E. From the above documents it is clear that the bonds proceeds have been given to us by Barclays Bank PLC and the same has been sourced by them from Deutsche Bank London. Thus the source of the funds is fully explained.

The matter of order u1s.263 was challenged by RCOM before Income Tax Appellate Tribunal. Tribunal vide order dated 5.2.2013 in / Mum 12012 has held that the managers to the issue had subscribed to the FCCB and that it was the managers' sole discretion / obligations to find the customers if it wanted. It further heldthat the money was actually received from and on behalf of the manager to the issue. Tribunal noted that the global certificate was issued in the name of the manager. Reference is made to the para 5.5 and 5.6 of the said Tribunal order. Tribunal therefore held that the department was not justified inputting obligation on the assessee to prove the identity, capacity and credit worthiness of the subsequent subscribers, which was beyond the reach of the assessee. A copy of the said Tribunal order was enclosed with letter dated 18.12.2013 as Annexure 4 thereto.

Thus the matter of applicability of section 68 has already been considered by Tribunal in the same facts as ours and has held that based on the documents relevant to FCCB issue, the subscriber to the bonds is the Manager to the issue. In our case Manager to issue of FCCB was Barclays Capital PLC. As stated earlier this is evident from page 122 of the Offer Document. We therefore submit that the reasons recorded as regards non availability of the name of band holders is not correct in as much as the name was available in the Offer Document and the same

8 ITA No.1076/M/2016 M/s. Reliance Natural Resources Ltd. was available at the time when the original assessment was framed and also available now. Further the payment by Barclays Bank and their source is also explained by evidence.

Relevant extract from the Subscription Agreement being Para 1.1 is reproduced hereunder:-

“Subject to and in accordance with the provisions of this Agreement and to agreement and execution of the Pricing Letter (as defined in Clause 1.8), the Issuer agrees to issue the Bonds and the Manager agrees with the Issuer to subscribe and pay for or to procure subscribers to subscribe and pay for the Bonds on the Closing Date at the issue price of 100 per cent, of the aggregate principal amount of the Bonds less the commission and concession referred to in Clause 5."

The appellant during the course of appellate proceedings has addressed the issues raised by the AO in the assessment order. The submission in this regard is reproduced above. The appellant has submitted the copy of offer document dated October 2006, subscription agreement, copy of paying, conversion and transfer agency agreement, letters from Barclays Bank PLC dated 16/10/2006 addressed to Deutsche Bank AG London authorizing them to make payment to assessee against delivery of global certificate, confirmation dated 16/10/2006 from Deutsche Bank to the assessee and to Barclays Bank PLC confirming the payment made by them to Barclays Bank, letter dated 16/10/2006 from Deutsche Bank AG London as common depository acknowledging the receipt of global certificate, letter dated 16/10/2006 from Deutsche Bank Luxemberg SA as registrar for receipt of global certificate representing 290.40 million US$, copy of global certificate issued by Deutsche Bank Luxemberg SA in the name of B T Globnet nominees Ltd. of UK submitted vide letter dated 18/03/2014, copy of scheme i.e. issue of foreign currency convertible bonds and ordinary

As per page 122 of the offer document, the company has entered into a subscription agreement with the Manager i.e. Barclays Capital PLC pursuant to which the company agreed to sell to the manager and manager agreed to subscribe principle amount of the bonds amounting to 300 million US$ in aggregate. It is also stated that the manager may on its own accounts enter into asset swap, credit derivatives or other derivatives transcription relating to the bonds/or shares at the same time offer and sell all the bonds in any secondary market transactions. The assessee stated that subsequent sale of the bonds by the manager is not relevant for the purpose of source of funds vis-à-vis the company as the funds have not been received from subsequent holders if any but from the Barclays. Original subscriber to the bonds are Barclays Capital PLC i.e Manager to the FCCB issue and this document was already available to the A.O and therefore it is not correct to say that the names of the bondholders is not available.

Para 2.1 of page 32 of the offer documents says that bond certificate will be issued to each bond holder in respect of its registered holding of the bonds. Further upon issue of bond, same will be represented by the global certificate deposited with common depository and registered in the name of nominee of the common depository. It is further provided that except in the limited circumstances described in the global certificate, owners of interest in bond represented by the global certificate will not be entitled to receive distinctive certificate in respect of their individual holding of bond.

The circumstances under which the bond holder is entitled to receive individual distinctive certificate is specified on page 101 of the offer document under the head exchange and registration of title. Same is reproduced as under:

"Owners of interests in the Bonds in respect of which the Global Certificate is issued will only be entitled to have title to the Bonds registered in their names and to receive individual definitive Certificates if either Euroclear or Clearstream (or any other clearing system as shall have been designated by the Company and approved by the Trustee on behalf of which the Bonds evidenced by this Global Certificate may be held) is closed for business for a continuous period of 14 days (other than by reason of holidays, statutory or otherwise) or announces an intention permanently to cease business or does in fact do so.”

In such circumstances, the Company will cause sufficient individual definitive Certificates to be executed and delivered to the Registrar for completion, authentication and dispatch to the relevant Bondholders. A person with an interest in the Bonds in respect of which this Global Certificate is issued must provide the Registrar with a written order containing instructions and such other information as the Company and the Registrar may require to complete, execute and deliver such individual definitive Certificates."

12 ITA No.1076/M/2016 M/s. Reliance Natural Resources Ltd. The assessee therefore submits that the name of bond holders has been duly provided to the AO. The bonds are subscribed by Barclays Bank and represented by one global certificate. As per the international practice, interest in global certificate and the bond is transferred through the system of clearing. Euroclear maintains details of subsequent transfer of bonds from one person to another. The details of which are mentioned in para 102 of the offer document under the title transfers. The assessee states that "Transfer of interest in the bonds represented by the global certificate will be effected through the records of Euroclear and Clearstream Luxembourg and their respective participant with accordance with the rules and procedures of Euroclear and Clearstream Luxembourg and their respective direct and indirect participant. Thus the bonds are not transferred but what is transferred is interest in bonds. Therefore the bond continue to remain in name of one person though the interest in bonds may get divided between various individual buyers. Details of such beneficial interest is maintained through depository and not by the company. This system is similar to the shares of Indian company issued to depository accounts who have the sub-accounts of equity holders. Whenever transfer of shares happens between two shareholders the same is registered through the depository and do not come to the company. Only difference between the demat system in India and depository abroad is that the names of the subsequent holders are protected by the relevant laws of the country where the depository is situated."

Para 2.1 of the offer documents provided for maintenance of register of the bond holders. However, this register is maintained by the registrar and not the company. In this case, Deutsche Bank London SA is the registrar which maintains such register and the company does not maintain it. It is therefore submitted that the A.O has made a presumption that the company was bound to make the payment of principal and interest directly to each bondholder and therefore the company must be in possessionof details regarding ultimate investor in FCCB. It is submitted that the contention of the A.O is not correct and that "payment ofprincipal in respect of bond represented by the global certificate will be made to the order of principal agent or payee agent as notified to the bond holders. In this connection we invite your attention to the scheme under which the FCCB bonds are issued i.e. issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Mechanism) Scheme 1993 notified vide Notification No.G.S.R. 700(E) dated 12thNovember, 1993. The said scheme is annexed as Annexure 6. In para 10 of the said notification it is provided that the provisions of Double Taxation Avoidance Agreement between India and the country of residence of Overseas Depository bank is applicable in respect of matter of interest on FCCB. Thus it is very clear that the interest is payable to the depository who in turn makes the payment to various beneficial interest owners of the bonds. The bonds are registered in the name of Global Depository and only when the bondholders converts the bonds into shares, the information thereof is received us.”

Therefore the appellant submits that they have entered into a subscription agreement with the manager i.e. Barclays Bank PLC in respect of subscription of the bonds. As per the subscription agreement dated 10/10/2006 the 13 ITA No.1076/M/2016 M/s. Reliance Natural Resources Ltd. assessee has agreed to sell to the manager and the manager has agreed to subscribe for 300 million US$ aggregate principle amount of the bonds as per the subscription agreement (Page 122 of the offer document) and the company had agreed to issue the bonds and the manager i.e. Barclays Bank PLC agreed with the issuer to subscribe and pay for or to procure subscribers and pay for the bonds (para 1.1 of the subscription agreement). The Barclays Bank PLC paid 290,400,400 US$ after deducting their commission and expenses. The Barclays Bank PLC may for its own account entered into asset swap credit derivatives or other derivatives transaction relating to the bonds or the shares at the same time as the offer and sale of the bonds in secondary market conditions. The manager may hold long or short decisions in such bonds or derivatives or in the shares and no discloser will be made of such decisions. The extract of para 1.1 of the subscription agreement is as under “"Subject to and in accordance with the provisions of this Agreement and to agreement and execution of the Pricing Letter (as defined in Clause 1.8), the Issuer agrees to issue the Bonds and the Manager agrees with the Issuer to subscribe and pay for or to procure subscribers to subscribe and pay for the Bonds on the Closing Date at the issue price of 100 per cent, of the aggregate principal amount of the Bonds less the commission and concession referred to in Clause 5."

The appellant has also referred to the order of Ld.CIT(A) against original assessment order passed in this case. A copy of order was enclosed along with the submissions. In the original assessment proceedings, the FCCB issue expenses were disallowed as the same were treated as capital expenditure. In the appellate order passed by the Ld CIT(A) in appeal No.CIT(A)-13/Addl CIT 7(2)/185/09-10 dated 26/10/2010, the Ld.CIT(A) held that FCCB was in the nature of debenture/ borrowed funds and not share capital and hence FCCB issue expenses were allowable as revenue expenditure. The Ld.CIT(A) also noted that it was not mandatory that shares has to be issued against FCCB borrowed. The extract from the appellate order is reproduced as under: "(a) The amount has been received towards issue of bonds and not share capital asperpara 6 of the terms and conditions of issue of bonds offering circular dated 12/10/2006,it has been provided that:

1 Bond holders have the right to convert the bonds into shares at any time during the conversion period.

2 The right of the bondholder to convert the bonds into shares is called the conversion right. Subject to any upon compliance with the provisions of this condition, the conversion right attaching to any bond may be exercised, at the option of the holderthereof, at any time (subject to the next paragraph) on and after 27 November 2006 upto the close of business (at the place where the certificate evidencing such bond is deposited for conversion) on 10 October 2011 (but except as provided in condition 6.1.4 and condition 10, in no event thereafter) or if such bond shall have been called for redemption by the issuer before the maturity date, then upto the close of business (at the place

14 ITA No.1076/M/2016 M/s. Reliance Natural Resources Ltd. aforesaid) on the seventh day (at the place aforesaid) prior to the dale fixed for redemption thereof provided that in each case, if the final such date for exercise of the conversion right is not a business day at the place aforesaid, then the period for exercise of conversion right by bondholders shall end on the immediately preceding business day at the place aforesaid. (b) Thus it is clear that these bonds are not mandatorily convertible in shares. As such the nature of these FCCB5 Bonds is in the nature of debentures/ borrowed funds and not share capital. It is therefore noted that the Ld.CIT(A) in the previous year after going through the scheme has held that it is in the nature of borrowed funds and not share capital. The appellant also submitted that subsequently the bonds were transferred to Reliance Power Ltd under demerger scheme approved by Hb' Bombay High Court vide order dated 15thOctober 2010 and the borrowings were repaid on maturity as per details in the case of Reliance Power Ltd.

The appellant has also referred to the decision of Hon'ble ITAT in the case of Reliance Communication Ltd. in AY.2007-08 dated 05/02/2013. The facts in this case are similar. In the case of Reliance Communication Ltd., the issue was that the assessee company claimed to have raised funds to the tune of Rs.6485 cores by way of foreign currency convertible bonds. Assessment was completed and thereafter the Ld.CIT passed an order u/s.263 of the Act contending that investigation was not carried out by the AO to establish the name, address, genuineness and credit worthiness of the actual subscriber FCCB in terms of section 68 of the Act. Hon'ble ITAT after elaborately discussing the case observed as under: 5. Foreign Currency Convertible Bonds 5.1. The factual matrix as regards this item is that the assessee raised funds through three issues of FCCBs during the previous year relevant to the assessment year under consideration. FCCB means a bond expressed in foreign currency, the principal and interest in respect of which is payable in foreign currency, issued by an Issuing company and subscribed to by a person who is resident outside India, in foreign currency and exchangeable into equity shares of the company after a specified period or to the redeemed. The assessee received proceeds of FCCB issues in Deutsche Bank, Singapore (DB)of US$ 500 million;and JP Morgan New York and Hong Kong andShanghai Banking Corporation of US$ 1000 million. These FCCBswere subscribed to by the Lead Managers namely, Deutsche Bank Hong Kong (DB HK) for US$ 500 million; JP Morgan Securities Ltd. U.K. and Hong Kong and Shanghai Banking Corporation for US$] 000 million. 5.2. The AO enquired about this aspect of the matter and the assessee furnished its reply dated 17.4.2009, a copy of which hasbeen placed at page 25 of the Paper Book (PB). By the said reply, the assessee submitted that it issued FCCBs in three tranches aggregating to US$ 1500 million. The name and address of the subscribers to the three tranches of FCCBs and the corresponding amounts were duly

15 ITA No.1076/M/2016 M/s. Reliance Natural Resources Ltd. indicated by showing name and address of the subscribers such as DB HKfor the FCCB US$ 500 million. The details of the bank in which the proceeds of FCCBs were parked in the foreign countries and from where these were transferred to Indian Bank, were also furnished. Along with the said reply, the assessee submitted copies of Offer Memorandum of the FCCBs issued, GlobalCertificate along with the Registrars confirmation of entries of the Bondholder in Register, Foreign Inward Remittance Certificate and the details of FCCBs as per the Offer documents and Global Certificates.

5.3. Both the sides are in agreement that the facts and circumstances of the three FCCB issues are similar. For the sake of convenience and on representative basis, the parties chose to take up the FCCB issue of US$ 500 million with DB HK as Lead Manager for making their respective submissions. The assessee entered into a Subscription Agreement with DB HK on 21.3.2006, as per which DB HK agreed to subscribe to the FCCB issue of US$ 500 million. As per Clause-I of the Agreement, the assessee agreed to issue the Bonds and the Lead Manger agreed to subscribe and pay for or to procure subscribers to subscribe and pay for the Bonds on the closing date at the issue price of hundred per cent of the aggregate principal amount of the Bonds less the commission and concession referred to in Clause-5. As per Clause 1.2, the Issuer assessee undertook to prepare and deliver to the Lead Manager anOffering Circular not later than four business days prior to the closing date. The assessee issued Offering document dt.05.05.2006 to DB HK, clarifying that the Bonds would be represented by single Global Certificate (GC). Upon issuance, the Bonds were represented by a Global Certificate deposited with a Common Depositary. The terms and conditions of the Bonds given as per Schedule-1 to the Agreement provide that the Bonds were to be issued in the registered form in the denomination of US$ 1000 each. As per Clause 3.2, no individual certificates in respect of interest (share) in any Bonds were to be issued in exchange for the Global certificate except in the circumstances provided in Clause 3.3. According to clause 3.3, individual certificates were to be issued only in the prescribed circumstances, such as, the Common depositary or any successor to the common depositary notifying to the company in writing that it is at any time unwilling or unable to continue to act as a depositary and a successor depositary is not appointed by the Company within 90 days or Euroclear, Clearstream Luxembourg (Stock exchange) is closed for business for a continuous period of 14 days, etc. As per the Paying, Conversion and Transfer Agency Agreement dated 9.5.2006, a copy of which has been placed in the PB, the assessee Company agreed to deliver to the Registrar a duly executed GC. Such GC was issued on 09.05.2006, being the closing date of FCCB, and delivered to DB, Luxemburg (Registrar). A copy of the Global Certificate issued by the assessee in the name of BTGlobenet Nominees Limited for US$ 500 million is available at pages 42 onwards of PB. It was registered in the name of BT Globenet as the nominee of DB

16 ITA No.1076/M/2016 M/s. Reliance Natural Resources Ltd. London, which was the Common Depository. The Registrar authenticated the Global Certificate uponhe written order of the company and arranged for the delivery of the Global Certificate to the depositary. The assessee instructed DB London to hold the GC on its behalf till DB HK instructs it to effect the payment and thereafter to hold it for the subscriber, that is, DB HK. Payment of US$497.500 million (net after deduction of expenses and commission) was made by DB HK that is, the subscriber, on the instructions of the assessee. Copies of the letter authorizing payment and the cross receipt in respect of US$ 497,500,000 are available at pages 61 and 62 of PB. The assessee received such payment on 09.05.2006 which was reflected in its books of account. The assessee duly informed the Reserve Bank of India (RBI) about such issues of FCCBs from time to time at the relevant stages. It can be noticed from letter doted 28.3.2005 issued by RBI authorizing the assessee to issue FCCBs under Automatic Approval Route. 5.4. The case of Id. CIT is that the AO should have examined the identity, capacity and credit worthiness of the actual subscribers' to the FCCB issue in terms of section 68. In his opinion, the acceptance by the AO of the assessee's contention that the amount was eventually received from DB HK, the subscriber, was not appropriate. Now the question arises as to whether the Id. CIT was justified in holding that the onus u/s 68 of the Act could have been discharged only on proving three pre- requisites - identity, capacity and creditworthiness - in respect of actual subscribers and not DB HK, who undertook to subscribe to the FCCB and remitted the proceeds after partly finding some further subscribers and partly itself subscribing to the FCCB. 5.5. Section 68 of the Act clearly provides that where any sum is found credited in the books of an assessee maintained for any previous year, and the assessee offers no explanation about the nature and source thereof or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, the sum so credited may be charged to income-tax as the income of the assessee of thatprevious year. A bare perusal of this provision divulges that there is an obligation on the assessee to prove the identity, capacity and credit worthiness of the person from whom the money is actually received. At the cost of repetition, we summarize the entire proceedings in respect of FCCB of US$ 500 million which was undertaken to be subscribed to by DB HK. A GC for the whole issue was issued in favour of the nominee of DB HK who could have either subscribedto all the Bonds itself or solicited customers. Itwas the solediscretion/ obligation of the DB HK to find such customers, if itwanted. Admittedly, DB HK subscribed to/collected the sum in respect of US$ 500 million and after deduction of their commission, remitted the balance USD 497,500,000 to the assessee. 5.6. It is palpable from the above narration of facts that the assessee was concerned with and did actually receive US$ 497.500 million from and on behalf of DB HK, which was duly recorded in its name. It is not understandable, in the facts and circumstances of the extant case, that how the assessee could have entered the names and addresses of the 17 ITA No.1076/M/2016 M/s. Reliance Natural Resources Ltd. actual subscribers in its books of account, when the subscriber, as far as the assessee is concerned, was DB HK. The Global Certificate was issued by the assessee in the name of DB HK. It was for DB HK to subscribe to the entire FCCB or find customers for a part or total of such issue. The decision on inviting other customers from outside India to subscribe to the FCCB and to what extent was the sole responsibility of DB HK, without any instructions or involvement of the assessee in India. In so far as the assessee is concerned, it was only supposed to get the amount against FCCB from DB HK, which it, in fact, received. The fact that Global Certificate was issued in the name of nominee of DBHK amply proves that it was the obligation of DB HK to pay towards FCCB issue of US$ 500 million. The Id. CIT has not referred to any material which indicates that the assessee had details of the actual subscribers at the time of issuance of FCCB or it was obliged to keep such details. No material has been brought to our notice even by the Id. DR to show that at that stage the assessee had any direct contact with the actual subscribers to the FCCB, different from DB HK. It can be observed from the details of the shares issued, on conversion of FCCB at a much later stage, that DB HK itself opted to subscribe for a certain part of the FCCB and issued a portion thereof to other customers who also happen to be international financial institutions only. At the stage of issuance of Bonds, there was privity of contract between the assessee and DB HK on one hand and between DB HK and actual subscribers on the other. It was the duty of DB HK to eventually get the shares allotted or refund granted to itself and other international financial institutions at the relevant point of time. It was only at the stage of issuance of shares or the granting of refund, that the assessee was to do the needful upon intimation by DB HK about the persons who had purchased separate interest (shares) in the GC. It is a matter of record that the assessee issued shares on conversion to certain parties, such as, JP Morgan Securities Ltd., The Hong Kong and Shanghai Banking Corporation Limited and DB HK itself in next year on various datesfrom 18.10.2007 to 31.1.2008. Only on the issuance of shares, these international financial institutions could be said to have come into direct contact with the assessee company. At the stage of issuance of Bonds in the previous year relevant to the assessment year under consideration, such customers of DB HK were notentitled to directly approach the assessee company in respect of any matter concerning the issuance of Bonds. When such is the situation, we fail to appreciate as to how the assessee could record the names of actual subscribers other than DB HK in its books of account and further prove their identity, capacity and credit worthiness. On a specific query from the bench, the learned Departmental Representative could not bring to our notice any statutory requirement or guideline issued by the RBI or any other Government authority fastening obligation on the assessee to maintain a record of the actual subscribers at that stage and record in their names instead of DB HK, who actually signed subscription agreement with the assessee. During the currency of the GC, only DB HK remained the subscriber to the FCCB issue of the assessee. The assessee was only

18 ITA No.1076/M/2016 M/s. Reliance Natural Resources Ltd. required to prove the identity, capacity and creditworthiness of DB HK who subscribed to its full issue of FCCB (some part directly and some part through its own customers), which is not in doubt. The fact that the assessee received the amount of subscription of Bonds from DB HK has not been denied by Id CIT. The further fact that Global certificate in respect of Bonds was issued in favour of DB HK and upon conversion of such Bonds, some of the shares were issued in favour of DB HK and remaining in favour of other international financial institutions has also not been disputed by the Id. CIT. In our considered opinion, the assessee adequately discharged the onus cast upon it in terms of section 68. The probe suggested by the Id. CIT could have been possible in the assessment of DB HK, who eventually partly subscribed to the Bonds itself and partly issued these to the international financial institutions. In view of these facts, we are of the considered opinion that ld. CIT was not justified in putting obligation on the assessee to prove the identity, capacity and creditworthiness of the actual subscribers, which fact was beyond its reach at the relevant time. We, therefore, do not approve the stand taken by Id. CIT on this issue."

The AO however did not consider the order contending that this was related matter u/s.263. However, the fact remains that the issue is identical in both the cases where the issue is regarding the subscription of the foreign currency convertible bonds in context of section 68 of the Act. Diversion of the proceed for non-business purpose does not taint the source of fund. Hon'ble Tribunal, in this case has already held that by furnishing the details of the original subscriber the assessee has duly discharged its onus. The appellant has further submitted i) Letter from Barclays Bank PLC dated 16/10/2006 addressed to Deutsch Bank AG London authorizing them to make payment to them against the said of global certificate. ii) Confirmation dated 16/10/2006 from Deutsch Bank Luxemberg SA as registrar in receipt of global certificate representing 290.40 million US$. The appellant therefore submitted that the bond proceeds have been given to them by Barclays Bank PLC and in view of the decision of the jurisdictional ITAT in the case referred above, it is established that the assessee has duly discharged its onus. The appellant has given point wise reply to all the allegations of the A.O as reproduced above which are self explanatory. In view of the submission made by the appellant, the case was discussed with the AO also. It is noted that the information received so far on this issue, as also discussed with the A.O is not so as to draw any adverse inference on the issue of further beneficial owners of the FCCB and in the context of section 68 of the IT Act. Further A.O or concerned authority have also not found any information or document in this context more than or otherwise than the material / information existing at the time of assessment which could give rise to any actionable cause and anticipatory propositions are 19 ITA No.1076/M/2016 M/s. Reliance Natural Resources Ltd. not liable to be considered in existing facts and circumstances of the case. Looking into the overall facts of the case it is therefore noted that the appellant has duly discharged its onus by filing the details of the subscriber. No adverse inference against this submission has been noted by the AO. Hb' Jurisdictionaltribunal has already held in exactly similar case of RCOM that under such circumstances, section 68 of the Act can not be invoked under the facts and circumstances of the case. The appellant is not privy to the subsequent holders of the bond if any and further as held by Hb' Tribunal in such matter only the original subscriber is relevant. LdCIT(A) also in the appellate order against the original assessment order has held that the transaction is in the nature of borrowing and therefore issue expenses can not be held as capital in nature. There is no instance of payment made by the company to any other person. The A.O has also talked about the deployment of fund. As per SEBI report the money raised by FCCB has not been used for the purpose of business of the assessee but was used to invest in the shares of group company. However this aspect is irrelevant to the issue which is section 68 of the I T Act 1961. The issue is directly covered by the decision of Hb' Jurisdictional ITAT (Supra) and is binding in nature. Since the facts of the case is identical to that of Reliance Communication Ltd. therefore, respectfully following the decision of Hb’ Jurisdictional ITAT (supra) the addition made by the A.O is hereby deleted for the reasons as discussed above and as per law applicable in this behalf as held by Hb’ ITAT in the case of Reliance Communication Ltd. This ground of appeal is therefore allowed.”

20 ITA No.1076/M/2016 M/s. Reliance Natural Resources Ltd. that if the provisions of section 68 are applied to the FCCB proceeds, the interest expenses and FCCB expenses were also to be disallowed as non genuine.

Description Issue of FCCB of USD 300 of Events Million Reliance Natural Resources Reliance Communications Limited ("RCOM") Limited ("RNRL") Particulars Particulars 10.10.2006 21.03.2006 Lead Barclays Bank PLC ("Barclays"), Deutsche Bank Hong Kong (“DB HK”), Lead Manager Lead Manager, as subscriber to Manager, as subscriber to aforementioned aforementioned issue, signed the issue, signed the Subscription Agreement as Subscription Agreement as per which per which DB HK agreed to subscribe to the Barclays agreed to subscribe to the FCCBs of USD 500 million proposed to be FCCBs of USD 300 million proposed issued by RCOM (Para 5.3, Pg 5) to be issued by RNRL (pg 338-352 of PB) 12.10.2006 05.05.2006 Offer Document RNRL issued Offer Document to RCOM issued Offer Document to DB HK Barclays (pg 155-337 of PB) (Para 5.3, Page 5 & 6) 16.10.2006 09.05.2006 Global RNRL issued a single Global RCOM issued a single GC Certificate Certificate ("GC") representing the representing the aggregate aggregate principal of USD 300 principal of USD 500 million and million and delivered it to DB, delivered it to DB, Luxemburg Luxemburg ("the Registrar") of ("the Registrar") of Euro Clear and Clear Common The Registrar registered the GC in The Registrar registered the GO in the Depository the name of BT Globenet as the name of BT Globenet as the Nominee of Nominee of DB, London, which was DB, London, which was the Common the Common Depository ("CD") of Depository ("CD") of the Exchanges and the Exchanges and released the released the authenticated GO to DB, authenticated GC to DB, London as London as the CD of the Exchange (Para the CD of the Exchange. (pg 396- 5.3, Page 6) 404 of PB) Instructions to RNRL instructed the CD (DB ROOM instructed the CD (DB London) hold G l o b a l London) to hold the GC on its to hold the GO on its behalf till DB HK Certificate behalf till Barclays instructed the C D to instructed the CD to ef fect the effect the paym ent to RNRL and paym ent to ROOM and thereafter to hold the thereafter to hold the G C f o r t h e G O f o r t h e a c c o u n t o f t h e subscriber i.e. DB HK (Para 5.3, Page 7) a c c o u n t o f t h e subscriber i.e. Barclays (pg 392 of PB) Instruction As per the Paying, Conversion and As per the Paying, Conversion and Transfer Agency Agreement dated 9.5.2006, RCOM to deliver Transfer Agency Agreement dated agreed to deliver to the Registrar a duly Global 16.10.2006, RNRL agreed to deliver executed GO. (Para 5.3, Page 6) Certificate to the Registrar a duly executed GC. (pg 355 of PB) Instruction for RNRL instructed Barclays (i.e. the RCOM instructed DB HK (i.e. the payment from Subscriber) to make the net of fees Subscriber) to make the net of fees payment Subscriber to payment of USD 290.40 million by of USD 497.5 million by way of subscription Issuer of FCCB way of subscription for the FCCBs for the FCCBs (Para 5.3, Page 7) Instructions for Barclays instructed the CD to DB HK instructed the CD to release the net releasing of release the net proceeds of the proceeds of the FCCBs to the designated funds from FCCBs to the designated bank bank account of RCOM (Para 5.3, Page 7) Lead Manager account of RNRL Fund received RNRL received the net sum of USD ROOM received the net sum of USD 497.5 290.40 million from Barclays million from DB HK through the CD and issued a through the CD and issued a receipt for the same receipt (Para 5.3, Page 7)

15.10.2010 Demerger FCCBs of USD 300 million were Scheme transferred to Reliance Power Ltd. under the Demerger Scheme - - - approved by the Hon'ble Bombay High Court

14.10.2011 From 18.10.2007 to 31 .01 .2008 Conversion FCCBs of USD 100,000 were ROOM issued equity shares on of FCCB converted into shares Reliance conversion of bonds to various into shares Power Ltd. has issued 43,860 shares to bond holders (Para 5.6, Page 11) FCCB's holders during F.Y. 2010-11. (pg 485-486 of PB) 14.10.2011 09.05.2011 Redemption Balance FCCB of USD 299.90 RCOM repaid the FCCB to of of FCCBs million was redeemed to the Deutsche Bank AG, London, FCCB's Holders. (pg 485-486 of PB) Principal Agent as per the Paying, Conversion and Transfer Agency Agreement dated 09.05.2006 b 24 ITA No.1076/M/2016 M/s. Reliance Natural Resources Ltd.

RCOM RNRL Sr. ITAT Paper No. Particulars Particulars Order Book 1. RCOM raised funds by way of FCCB during Pg 4 RNRL raised funds by 155- F.Y. 2006-07 from DB HK, JP Morgan USA Para way of FCCB during F.Y. 337 and DB Hong Kong of USD 500 million 5.1) 2006-07 vide offering each. circular dt.12.10.2006, issued on 16.10.2006 2. R C O M i s s u e d F C C B a n d P g 5 R N R L i s s u e d 338- leadmanager agreed to subscribe and pay (Para b o n d s 352 for thebonds issued by ROOM. 5.3) a n d leadmanager i.e. BarclaysBank agreed to subscribeand pay for the bonds 3. RCOM issueddocumentdt. 05.05.2006 to Pg 5 Single GC for FOOB 396- D B H K ( l e a d m a n a g e r ) clarifying & 6 fundsis issued and 404 that Bonds will berepresented by single ( P a r a registered int h e n a m e GlobalCertificate (GO) depositedwith a 5.3) o f Common Depository. C o m m o n Depository for EuroclearBank andClearstream, Luxemburg. 4 As per Clause 3.2, noindividual Pg 6 3.2.1. Definitive 355- certificatesrespect of interest (share) inany in (Para Certificatesin respect of 356 Bonds were to be issuedin exchange for 5.3) interests in anyBonds will the Globalcertificate except in not be issued inexchange thecircumstances provided inClause 3.3. for interest in theBonds According toclause 3.3, evidenced by theGlobal individualcertificates were to be Certificates except inthe issuedo n l y i n t h e p r e s c r i b e d circumstances providedin circumstances, such as, the Common clause 3.2.2. depositary or any successor to the common depositary notifying to the company in writing that it is at any time unwilling or unable t o c o n t i n u e t o a c t a s a depositary and a successor depositary is not appointed by the Company within 90 days orEuroclear, Clearstream Luxembourg (Stock exchange) is closed for business for a continuous period of 14 days, etc.

25 ITA No.1076/M/2016 M/s. Reliance Natural Resources Ltd. 5 As per the Paying,Conversion and Pg 6 As per the 353- TransferA ge nc y Agre em ent date d (Para Paying,Conversion and 391 9.52006, ROOM agreed todeliver to DB 5.3) TransferA ge nc y Luxemburg (theRegistrar) a duly A greeme nt date d executedGC. 1610.2006, RNRL agreedto deliver to DB Luxemburg(theRegistrar)a dulyexecuted GC.

6 GC was issued in the nameof BT Pg 6 GC was issued in the 396- GlobenetNomineesLimited, nominee of (Para nameof BT Globenet 404 Deutsche Bank London which was 5.3) NomineesLimited, London commondepository. nominee ofD B L o n d o n w h i c h w a s common depository.

7 RCOM instructed the CD (Deutsche Bank Pg 7 RNRL instructed the 392 London) to hold the GC on itsbehalf till DB (Para Common Depository (DB HK instructedthe CD to effect the 5.3) London) to hold the Global paymentto ROOM and thereafter tohold the Certificate on its behalf till GC for the accountof the subscriber i.e. DB Barclaysinstructed the CD HK to effectthe payment to RNRL andthereafter to hold the GO forthe account of thesubscriber i.e. Barclays

8 It is not understandable, inthe facts and Pg 8 In RNR L c as e, t h e circumstancesof the case, that how ROOM & 9 o nl ysubscriber is could have entered thenames and (Para Barclays. addresses of theactual subscribers in 5.6) its books of account, when the subscriber, as far as the ROOM is concerned, was DB HK.

The GO was issued by theRCOM in the GC was issued in the name of DBHK. It was for DB HK nameof BT Globenet tosubscribe to the entire FCCB orfind NomineesLimited customers for a part or total of such issue. (nominee)

The decision on inviting othercustomers In the present case also, from outside Indiato subscribe to the FCCB RNRL has received funds andto what extent was the sole From subscribers responsibility of DB HK, without any Barclays. instructions or involvement of the assessee in India. In so far as the assessee is concerned, it was only supposed to get the amount against FCCB from DB HK, which it, in fact, received. The Id. CIT has not referred t o a n y In RNRL c as e als o m a t e r i a l w h i c h indicates that the the a c t u a l assessee had details of the 'actual s u b s c r i b e r i s subscribers' at the time of issuance of Barclays and details FCCB or it was obliged to keep such of f u r t h e r details. No material has been brought to s u b s c r i b e s b y our notice even by the Id. DR to show that B arclays at the tim e at that stage the assessee had any of issuance of FCCB is directc o n t a c t w i t h t h e a c t u a l not available and RNRL is subscribers to the FCCB, different from DB not o b l i g e d t o k e e p HK. s u c h details.

9 It was only at the stage of issuance of Pg 10 FCCBs of USD 100,000 485- shares or the granting of refund, that the (Para were converted into shares 486 as s ess ee was to do the needful 5.6) and Reliance Power upon intimation by DB HK about the Ltd. has issued 43,860 persons who had purchased separate shares to FCCB's holders interest (shares) in the GC. during F.Y.2010-11.

It is a matter of record that the B al a nc e F C CB of assessee issued shares on US D 2 9 9 . 9 0 conversion to certain parties, such m i l l i o n w a s as, JP Morgan Securities Ltd., The Hong redeemed to the FCCB's Kong and Shanghai Banking Corporation Holders in F.Y. 2011-12. Limited and DB HK itself in next year on various dates from 18.10.2007 to 31.1.2008. Only on t he i ss uanc e of shares, these international financial institutions could be said to have come into direct contact with the assessee company. At the stage of issuance of Bonds in the previous year relevant to the assessment consideration, s u c h customers of DB HK were not entitled to directly approach the assessee company in r e s p e c t o f a n y m a t t e r concerning the issuance of Bonds. W hen such is the situation, we fail to appreciate as to how the assessee could record the names of actual subscribers other than DB HK in its books of account a n d f u r t h e r p r o v e t h e i r identity, capacity and credit worthiness.

27 ITA No.1076/M/2016 M/s. Reliance Natural Resources Ltd. certificate except in circumstances provided in the clause. The individual certificates were issued only in prescribed circumstances such as common depository or any successor to the common depository notified to the assessee company in writing that in any time unwilling or unable to continue to act as a depository and successor depository is not embedded by the assessee company within 90 days or Euroclear and Clearstream, Luxemburg (Stock Exchange) is closed for a business for a continued period of 14 days. As per payee, conversion and transfer agency agreement dated 16.10.2006 being the closing date of FCCB and delivered to DB Luxemburg registrar, a copy of certificate issued by assessee in the name of BT Globenet Nominee Ltd of DB London is the common depository. The registrar authenticated the global certificate upon which the written order of the company and arranged for the delivery of global certificate to depository. The assessee instructed DB London to hold the GC on his behalf till Barclays Bank instructed it to effect the payment and thereafter hold it for subscriber i.e. Barclays Bank. The payment of US$ 290.40 millions was made by way of subscription for FCCB. The assessee has received US$ 290.40 million from Barclays Bank through Deutsche Bank and issued a receipt on 15.10.2010. FCCB of US$ 300 million were transferred to Reliance Power under demerger scheme approved by Hon’ble Bombay High Court on 15.10.2011. The FCCB of US$ 1 lakh were converted into shares in Reliance Power Ltd. and issued 43862 shares to FCCB holders during F.Y. 2010-11. Balance FCCB of US$ 299.90 millionswere redeemed to FCCB holder.

29 ITA No.1076/M/2016 M/s. Reliance Natural Resources Ltd. subscriber. The Tribunal in its order has held that assessee has adequately discharged the onus cast upon it. In terms of section 68 the probe suggested by CIT could have been possible in the assessment of DB HK who eventually partly subscribed to the bond itself and partly issued this to international financial institution. The Tribunal has further held that Ld. CIT (A) was not justified in putting the obligation on the assessee to prove the identity, capacity and creditworthiness of actual subscriber which the fact was beyond the reach at the relevant time.

In the instant case, the facts are similar in the assessee’s case. In the assessee’s case, the facts are that the assessee has received net of US$ 290.40 million from Barclay Bank from Deutsche Bank AG London. Subscription agreement dated 10.10.2006 provides that issuer i.e. the assessee agrees to issue the bonds and the manger i.e. Barclay Bank PLC agrees with the issuer to subscribe and to pay for or to procure subscribers to subscribe and to pay for bonds at the issue price 100% of the aggregate principal amount of the bonds less the commission. In the offering circular dated 12.10.2006 in the chapter “Subscription and Sale” at page 122 of the Offering Circular, it is provided that the assessee has entered into subscription agreement with Barclay Bank PLC as per which the assessee has agreed to sell to the manager i.e. Barclay Bank PLC and Barclay Bank PLC has agreed to subscribe for US$ 300 million aggregate principal amount of the bonds. It further provides that the Manager i.e. Barclay Bank PLC or its affiliates may, for its own accounts, enter into asset swaps, credit derivatives or other derivative transactions relating to the bonds and / or the shares at the same time as the offer and sale of the bonds or in secondary market transactions. As a result of such transactions, the Manager or its affiliates hold long or short positions in such bonds or derivatives or in the shares. These transactions comprise a substantial portion of the offering and no disclosure made of such positions. The manager or its affiliates have purchased bonds and been allocated bonds for asset

30 ITA No.1076/M/2016 M/s. Reliance Natural Resources Ltd. management and / or proprietary purposes and not with a view to distribution. A bond certificate issued to each bondholder in respect of its register holding of bonds. Each bond and its certificate numbered serially with an identifying number which is recorded on the relevant certificate and in the register of bondholder which the issuer kept by the Registrar. The issuer kept the specified office of the Registrar a register on which entered the names and addresses of the holders of the bonds and the particulars of the bonds held by them and of all transfers of the bonds. From the facts and the documents submitted by the assessee with regard to transfer of funds by Barclays Bank we hold that assessee has received the amount from Barclays Bank and discharged the burden by providing all the information / documents. Thus, assessee was only required to prove the identity and creditworthiness of Barclays Bank who subscribed to issue of FCCB which is not in doubt. Therefore, in our opinion, assessee has adequately discharged onus cast upon it under section 68. Section 68 of the Act clearly provides that where any sum is found credited in the books of an assessee maintained for any previous year, and the assessee offers no explanation about the nature and source thereof or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, the sum so credited may be charged to income-tax as the income of the assessee of previous year. A bare perusal of this provision divulges that there is an obligation on the assessee to prove the identity, capacity and credit worthiness of the person from whom the money is actually received but not source’s source. We find that similar issue is decided by the co-ordinate bench in case of RCOM wherein the Tribunal has clearly held that section 68 does not apply to the facts of this case by observing as under: “5.1. The factual matrix as regards this item is that the assessee raised funds through three issues of FCCBs during the previous year relevant to the assessment year under consideration. FCCB means a bond expressed in foreign currency, the principal and interest in respect of which is payable in foreign currency, issued by an Issuing company and subscribed to by a person who is resident outside India, in foreign currency and exchangeable into equity shares of the company after a specified period or to the redeemed. The assessee

31 ITA No.1076/M/2016 M/s. Reliance Natural Resources Ltd. received proceeds of FCCB issues in Deutsche Bank, Singapore (DB)of US$ 500 million;and JP Morgan New York and Hong Kong andShanghai Banking Corporation of US$ 1000 million. These FCCBswere subscribed to by the Lead Managers namely, Deutsche Bank Hong Kong (DB HK) for US$ 500 million; JP Morgan Securities Ltd. U.K. and Hong Kong and Shanghai Banking Corporation for US$] 000 million. 5.2. The AO enquired about this aspect of the matter and the assessee furnished its reply dated 17.4.2009, a copy of which hasbeen placed at page 25 of the Paper Book (PB). By the said reply, the assessee submitted that it issued FCCBs in three tranches aggregating to US$ 1500 million. The name and address of the subscribers to the three tranches of FCCBs and the corresponding amounts were duly indicated by showing name and address of the subscribers such as DB HKfor the FCCB US$ 500 million. The details of the bank in which the proceeds of FCCBs were parked in the foreign countries and from where these were transferred to Indian Bank, were also furnished. Along with the said reply, the assessee submitted copies of Offer Memorandum of the FCCBs issued, GlobalCertificate along with the Registrars confirmation of entries of the Bondholder in Register, Foreign Inward Remittance Certificate and the details of FCCBs as per the Offer documents and Global Certificates. 5.3. Both the sides are in agreement that the facts and circumstances of the three FCCB issues are similar. For the sake of convenience and on representative basis, the parties chose to take up the FCCB issue of US$ 500 million with DB HK as Lead Manager for making their respective submissions. The assessee entered into a Subscription Agreement with DB HK on 21.3.2006, as per which DB HK agreed to subscribe to the FCCB issue of US$ 500 million. As per Clause-I of the Agreement, the assessee agreed to issue the Bonds and the Lead Manger agreed to subscribe and pay for or to procure subscribers to subscribe and pay for the Bonds on the closing date at the issue price of hundred per cent of the aggregate principal amount of the Bonds less the commission and concession referred to in Clause-5. As per Clause 1.2, the Issuer assessee undertook to prepare and deliver to the Lead Manager an Offering Circular not later than four business days prior to the closing date. The assessee issued Offering document dt.05.05.2006 to DB HK, clarifying that the Bonds would be represented by single Global Certificate (GC). Upon issuance, the Bonds were represented by a Global Certificate deposited with a Common Depositary. The terms and conditions of the Bonds given as per Schedule-1 to the Agreement provide that the Bonds were to be issued in the registered form in the denomination of US$ 1000 each. As per Clause 3.2, no individual certificates in respect of interest (share) in any Bonds were to be issued in exchange for the Global certificate except in the circumstances provided in Clause 3.3. According to clause 3.3, individual certificates were to be issued only in the prescribed circumstances, such as, the Common depositary or any successor to the common depositary notifying to the company in writing that it is at any time unwilling or unable to continue to act as a depositary and a successor depositary is not appointed by the Company within 90 days or Euroclear, Clearstream Luxembourg (Stock exchange) is closed for business for a continuous period of 14 days, etc. As per the Paying, Conversion and Transfer Agency Agreement dated 9.5.2006, a copy of which 32 ITA No.1076/M/2016 M/s. Reliance Natural Resources Ltd. has been placed in the PB, the assessee Company agreed to deliver to the Registrar a duly executed GC. Such GC was issued on 09.05.2006, being the closing date of FCCB, and delivered to DB, Luxemburg (Registrar). A copy of the Global Certificate issued by the assessee in the name of BT Globenet Nominees Limited for US$ 500 million is available at pages 42 onwards of PB. It was registered in the name of BT Globenet as the nominee of DB London, which was the Common Depository. The Registrar authenticated the Global Certificate uponhe written order of the company and arranged for the delivery of the Global Certificate to the depositary. The assessee instructed DB London to hold the GC on its behalf till DB HK instructs it to effect the payment and thereafter to hold it for the subscriber, that is, DB HK. Payment of US$497.500 million (net after deduction of expenses and commission) was made by DB HK that is, the subscriber, on the instructions of the assessee. Copies of the letter authorizing payment and the cross receipt in respect of US$ 497,500,000 are available at pages 61 and 62 of PB. The assessee received such payment on 09.05.2006 which was reflected in its books of account. The assessee duly informed the Reserve Bank of India (RBI) about such issues of FCCBs from time to time at the relevant stages. It can be noticed from letter doted 28.3.2005 issued by RBI authorizing the assessee to issue FCCBs under Automatic Approval Route. 5.4 The case of Id. CIT is that the AO should have examined the identity, capacity and credit worthiness of the ‘actual subscribers' to the FCCB issue in terms of section 68. In his opinion, the acceptance by the AO of the assessee's contention that the amount was eventually received from DB HK, the subscriber, was not appropriate. Now the question arises as to whether the Id. CIT was justified in holding that the onus u/s 68 of the Act could have been discharged only on proving three pre-requisites - identity, capacity and creditworthiness - in respect of actual subscribers and not DB HK, who undertook to subscribe to the FCCB and remitted the proceeds after partly finding some further subscribers and partly itself subscribing to the FCCB.

5.5. Section 68 of the Act clearly provides that where any sum is found credited in the books of an assessee maintained for any previous year, and the assessee offers no explanation about the nature and source thereof or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, the sum so credited may be charged to income-tax as the income of the assessee of that previous year. A bare perusal of this provision divulges that there is an obligation on the assessee to prove the identity, capacity and credit worthiness of the person from whom the money is actually received. At the cost of repetition, we summarize the entire proceedings in respect of FCCB of US$ 500 million which was undertaken to be subscribed to by DB HK. A GC for the whole issue was issued in favour of the nominee of DB HK, who could have either subscribed to all the Bonds itself or solicited customers. It was the sole discretion/obligation of the DB HK to find such customers, if it wanted. Admittedly, DB HK subscribed to/collected the sum in respect of US$ 500 million and after deduction of their commission, remitted the balance USD 497,500,000 to the assessee.

33 ITA No.1076/M/2016 M/s. Reliance Natural Resources Ltd. 5.6. It is palpable from the above narration of facts that the assessee was concerned with and did actually receive US$ 497.500 million from and on behalf of DB HK, which was duly recorded in its name. It is not understandable, in the facts and circumstances of the extant case, that how the assessee could have entered the names and addresses of the actual subscribers in its books of account, when the subscriber, as far as the assessee is concerned, was DB HK. The Global Certificate was issued by the assessee in the name of DB HK. It was for DB HK to subscribe to the entire FCCB or find customers for a part or total of such issue. The decision on inviting other customers from outside India to subscribe to the FCCB and to what extent was the sole responsibility of DB HK, without any instructions or involvement of the assessee in India. In so far as the assessee is concerned, it was only supposed to get the amount against FCCB from DB HK, which it, in fact, received. The fact that Global Certificate was issued in the name of nominee of DB HK amply proves that it was the obligation of DB HK to pay towards FCCB issue of US$ 500 million. The Id. CIT has not referred to any material which indicates that the assessee had details of the 'actual subscribers' at the time of issuance of FCCB or it was obliged to keep such details. No material has been brought to our notice even by the Id. DR to show that at that stage the assessee had any direct contact with the actual subscribers to the FCCB, different from DB HK. It can be observed from the details of the shares issued, on conversion of FCCB at a much later stage, that DB HK itself opted to subscribe for a certain part of the FCCB and issued a portion thereof to other customers who also happen to be international financial institutions only. At the stage of issuance of Bonds, there was privity of contract between the assessee and DB HK on one hand and between DB HK and actual subscribers on the other. It was the duty of DB HK to eventually get the shares allotted or refund granted to itself and other international financial institutions at the relevant point of time. It was only at the stage of issuance of shares or the granting of refund, that the assessee was to do the needful upon intimation by DB HK about the persons who had purchased separate interest (shares) in the GC. It is a matter of record that the assessee issued shares on conversion to certain parties, such as, JP Morgan Securities Ltd., The Hong Kong and Shanghai Banking Corporation Limited and DB HK itself in next year on various dates from 18.10.2007 to 31.1.2008. Only on the issuance of shares, these international financial institutions could be said to have come into direct contact with the assessee company. At the stage of issuance of Bonds in the previous year relevant to the assessment year under consideration, such customers of DB HK were not entitled to directly approach the assessee company in respect of any matter concerning the issuance of Bonds. When such is the situation, we fail to appreciate as to how the assessee could record the names of actual subscribers other than DB HK in its books of account and further prove their identity, capacity and credit worthiness. On a specific query from the bench, the learned Departmental Representative could not bring to our notice any statutory requirement or guideline issued by the RBI or any other Government authority fastening obligation on the assessee to maintain a record of the actual subscribers at that stage and recording their names instead of DB HK, who actually signed subscription agreement with the assessee. During the curency of the GC, only DB HK remained the subscriber to the FCCB issue of the assessee. The assessee was only required to prove the identity, capacity and creditworthiness of DB HK who subscribed to its full issue of FCCB (some part directly and some part through its own customers), which is not in doubt. The fact that the assessee received the amount of subscription of Bonds from DB HK has 34 ITA No.1076/M/2016 M/s. Reliance Natural Resources Ltd. not been denied by ld CIT. The further fact that Global certificate in respect of Bonds was issued in favour of DB HK and upon conversion of such Bonds, some of the shares were issued in favour of DB HK and remaining in favour of other international financial institutions has also not been disputed by the Id. CIT. In our considered opinion, the assessee adequately discharged the onus cast upon it in terms of section 68. The probe suggested by the ld. CIT could have been possible in the assessment of DB HK, who eventually partly subscribed to the Bonds itself and partly issued these to the international financial institutions. In view of these facts, we are of the considered opinion that ld. CIT was not justified in putting obligation on the assessee to prove the identity, capacity and creditworthiness of the actual subscribers, which fact was beyond its reach at the relevant time. We, therefore, do not approve the stand taken by Id. CIT on this issue.”

B) ………..

C) ………..

“(vi) Whether on the facts and in the circumstances of the case, the Hon’ble High Court has not erred in upholding the order of the Ld. Tribunal on the ground that there was no error of law in its order on the issue of Foreign Currency Convertible Bonds (FCCBs) without appreciating that the assessee / respondent herein had not discharged its onus of furnishing the actual subscriber’s identity, capacity and genuineness of the transaction, which is prerequisite under section 68 of the Income Tax Act, 1961? (vii)………….. (viii) whether the Hon’ble High Court has not erred in not appreciating that under section 68 of the Income Tax Act, 1961, it is not sufficient for an assessee to disclose that credits in their Books had been received through Banking channels; the identity as well as the creditworthiness of the actual subscribers must nevertheless be proved?”

The Hon’ble Supreme Court of India in its judgment for Special Leave to appeal (C) ….. CC No(s). 21779/2016 (Arising out of impugned final judgment and order dated 28/03/2016 in passed by the High Court of Bombay) in the case of Commissioner of Income Tax -10, Mumbai vs. M/s. Reliance Communication Ltd. passed the order which reads as under: “ORDER Delay condoned. We find no reason to entertain this special leave petition, which is, accordingly, dismissed. Pending application(s), if any, shall stand disposed of.”

Thus the order of Tribunal in case of RCOM has attain finality. Since the facts in case of RCOM are similar to the facts of the assessee’s case, following the said decision of Tribunal which is finally approved by the

Since we have held that the nature and source of funds of FCCB is fully explained and that the addition u/s.68 was rightly deleted by CIT(A), the addition of FCCB expenses and FCCB interest are also rightly deleted by CIT(A). CIT(A) has partially upheld the disallowance of FCCB interest and FCCB expenses on the reason of deployment of the funds in various securities. The said addition is a subject matter of assessee’s appeal and is separately

37 ITA No.1076/M/2016 M/s. Reliance Natural Resources Ltd. decided in subsequent paras. Thus, the addition of FCCB interest and FCCB expenses deleted by CIT(A) is correct as addition u/s.68 relating to FCCB funds is deleted.

38 ITA No.1076/M/2016 M/s. Reliance Natural Resources Ltd. of DIT (Intelligence), New Delhi. As per AO, the funds raised by issue of FCCB were used for investment purposes outside India and the same were used in various Yield Management Certificates (YMCs). The AO in course of re-assessment proceedings referred to various investments for different period the chart of which appears on the page 18 of the re-assessment order. The reasoning of the AO is that the FCCB funds we reused in business and the same has been diverted for non business purposes by investing the funds in YMCs. AO had disallowed the entire FCCB interest on the ground that the FCCB funds were found to be non genuine and addition was made u/s.68. Thus the claim of the AO was that the entire FCCB interest is disallowable as non genuine expenditure following the addition u/s.68 of the FCCB funds.

39 ITA No.1076/M/2016 M/s. Reliance Natural Resources Ltd.

41 ITA No.1076/M/2016 M/s. Reliance Natural Resources Ltd.

Order pronounced in the open court on 12.05.2017.