SHRIRAM RETAIL HOLDINGS PRIVATE LIMITED,CHENNAI vs. DCIT, CHENNAI

आदेश / O R D E R PER G. PAVAN KUMAR, JUDICIAL MEMBER:

ITA No.885/Mds/2015 :- 2 -:

2011 passed u/s.143(3) and 250 of the Income Tax Act, 1961 (herein after referred to as ‘the Act’).

The assessee has raised three substantive grounds, for the 2. sake of convenience the grounds are concised (i) the ld. Commissioner of Income Tax (Appeals) erred in confirming the disallowance u/s.14A r.w.r. 8D �1,42,32,769/- applying the provisions u/sec. 14A r.w. Rule 8D(2) (ii) the ld. Commissioner of Income Tax (Appeals) erred in confirming non allowability of Short Term Capital Gains of �14,00,00,000/- on forfeiture of warrants and (iii) the ld. Commissioner of Income Tax (Appeals) erred in confirming the additions of Sec. 14A r.w.r. 8D while computing the Book profit u/s.115JB of the Act.

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Authorised Representative of assessee appeared from time to time and filed the information. The ld. Assessing Officer on perusal of financial statements found that the assessee company has received dividend income of �3,34,37,502/-,interest income of �4,49,00,729/- and other income of �866/-. The dividend income earned on equity shares are claimed as exempted, whereas interest income accrued on the fixed deposits with Standard Chartered Bank. The ld. Assessing Officer alleged that the assessee company has claimed �13,00,300/- towards the Lead Management fee paid to DSP Merrill Lynch Limited, �2,48,175/- towards Advisory fee for restructuring was included in Professional charges. Further, the assessee company paid �1,20,00,000/- towards Escrow Management fee. The ld. Assessing Officer issued letter dated 17.12.2010 requesting to provide details of Professional Charges and Management charges and the ld. Authorised Representative explained and filed the letter referred at page 2 of the assessment order as under:-

‘’••••.•••• Fee for restructuring Rs. 2,48,175 related to business activity of assessee. These expenses were not incurred to earn dividend income. The lead management fee of Rs. 13,00,300 and Eskrow Management fee of Rs.1,20,00,OOO paid to DSP Merrilt Lynch Ltd and Standard chartered Bank respectively related to open offer issued for shares of Shriram City Union Finance Limited. The entire expenses related to our business of investment promotion. The receipt of Dividend is incidental to our business. During the year the appellant received only two dividends from Shriram City Union Finance limited. The Dividend was credited to our

ITA No.885/Mds/2015 :- 4 -: account under ECS. Hence, no expense was incurred to collect the dividend. However, We have already disallowed Rs.51,220 u/s 14A. Hence we request you not to disallow".

The ld. Assessing Officer based on the assessee’s submissions found that the amount paid to DSP Merrill Lynch Limited and Standard Chartered Bank are for the purpose of open offer for issue of shares of Shriram City Union Finance Limited and this specific expenditure was incurred for investment purpose. Other expenditure are for advisory fees related to Business promotion investments. The ld. Assessing Officer based on the submissions and facts is of the opinion that the expenditure of �1,20,00,000/- is related to the open offer of Shriram City Union Finance Limited shares incurred on acquisition of shares were dividend income on shares is exempted and the entire expenditure of �13,00,300/- is incurred for earning dividend income and same cannot be allowed and added to the Retuned income.

Similarly, the ld. Assessing Officer disallowed restructuring advisory fee of �2,48,175/- relating to the business activity is not allowable as expenditure. The ld. Assessing Officer found that the assessee has filed original Return of income on 15.10.2010 with disallowance of expenditure under Rule 8D �1,42,83,989/-. Subsequently, the assessee filed Revised return on 29.09.2011 and reduced disallowance under Rule 8D to �51,220/-. The expenditure claimed is directly

ITA No.885/Mds/2015 :- 5 -: related to the investments earning dividend income. During the financial year 2009-2010, the assessee received dividend income of �3,34,37,502/- but the assessee company suo motu disallowed expenditure u/sec. 14A r.w.r 8D �51,220/-. The ld. Assessing Officer issued letter dated 17.12.2012 with reasons for disallowance of expenditure under Rule 8D r.w.s. 14A. In compliance, the assessee company filed detailed explanations and ld. Authorised Representative argued on methodology and expenditure is purely business expenditure and same be allowed. The ld. Assessing Officer referred at page 5, para 4.1 of the order. But the ld. Assessing Officer has worked out disallowance under Rule 8D(2) under three limbs relying on the Tribunal decision in the case of ITO vs. Daga Capital Management (P) Limited 117 ITD 169 (Mumbai) were it was held that were the assessee engaged in the business of dealing in shares and securities, the disallowances are mandatorily required to be calculated as per provisions of Section 14A read with Rule 8D and ld. Assessing Officer computed the disallowances and after adjustment of disallowance which the assessee company has already disallowed �51,220/- has worked out to �6,84,294/- and the assessee aggrieved with the additions of Lead mangement fee and Escrow Management fees, advisory fee disallowed u/s.14A r.w.r. 8D and ITA No.885/Mds/2015 :- 6 -: disallowance u/s.14A r.w.r. 8D �6,84,294/-, filed an appeal before Commissioner of Income Tax (Appeals).

In the appellate proceedings, the ld. Commissioner of 4.

Income Tax (Appeals) considered the findings of the ld. Assessing Officer at page 3 to 6 of his order and written submissions filed by the assessee at page 7 referring similar business activity of group concern M/s. Shriram Capital Limited in assessment year 2005-06 and ITA No.639/Mds/2012 for assessment year 2007-08, on the concept of business expediency and commercial operations and non applicable of provisions of Sec. 14A, the ld. Authorised Representative prayed for deleting the disallowance of �1,20,00,000/- �13,00,300/-, �2,48,175/- and �6,84,294/-, the ld. Authorised Representative also submitted that the assessee is dealing in Shares and Securities and expenditure related are administrative in nature and no expenditure was incurred to collect dividend and assessee is having two sources of income being dividend income and interest income. The ld. Commissioner of Income Tax (Appeals) considered the submissions on the four disallowances relating to the exempted income and gave a categorical findings comparing with profit and loss account with earlier years at para 5.2.2 at page 11 to 16 and relied on the judicial decisions and functional

ITA No.885/Mds/2015 :- 7 -: applicability and Rejected the grounds of the assessee and confirmed the addition of the ld. Assessing Officer. Aggrieved by the order, the assessee assailed an appeal before Tribunal.

Before us, the ld. Authorised Representative reiterated the 5. submissions made in the assessment, appellate proceedings and also judicial decisions relied. The contentions of the ld. Authorised Representative being that the assessee is in the business of shares and stock and in receipt of dividend income and interest income and the expenditure of �1,20,00,000/- and Rs. 13,00,300/- was incurred as lead management fees and Escrow Management fees paid to Standard Chartered Bank and DSP Merrill Lynch in respect of open offer of shares of Shriram City Union Finance Limited. Further, the advisory fees paid to Ernst & Young Pvt. Ld is for restructuring and takes the characteristic of business expenditure and the assessee company has not incurred any expenditure for receiving the dividend income of �3,34,37,502/- and the assessee has disallowed �.51,220/-. Further, the ld. Assessing Officer has disallowed �6,84,284/- in addition to above disallowances made in the assessment order. The ld. Commissioner of Income Tax (Appeals) has confirmed the order of the ld. Assessing Officer. The ld. Authorised Representative submitted that the dividend income is incidental to assessee’s business who is a ITA No.885/Mds/2015 :- 8 -: dealer in shares and securities. The acquisition shares shall not be considered for disallowances u/sec. 14A of the Act. In the present case, the major three expenditures pertains to acquisition of shares in open offer of Shriram City Union Finance Limited and prayed for deletion of addition made by the ld. Assessing Officer.

Contra, ld. Departmental Representative relied on the 6. orders of Commissioner of Income Tax (Appeals) and vehemently opposed to the grounds.

We heard the rival submissions, perused the material on 7. record and judicial decisions cited. The ld. Authorised Representative emphasized that the assessee company has incurred expenditure for acquisition of shares in open offer of Shriram City Union Finance Limited and also restructuring fees �2,48,175/- and lead management fees of �13,00,300/- paid to DSP Merrill Lynch Limited and �1,20,00,000/- was paid to Standard Chartered Bank and DSP Merrill Lynch Limited. The contention of the ld. Authorised Representative that the assessee is in the business activity of shares and securities and 99% of income consist of dividend and interest income.

Therefore, this expenditure has be treated as business expenditure and be allowed. The ld. Authorised Representative drew our attention to the order of Tribunal in assessee’s own case of assessment year

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2009-10 in were similar issues were considered in respect of expenditure incidental to the business of investment promotion. Further, we perused the order of Karnataka High Court of CCI Ltd vs. JCIT. (2012) 20 taxman.com 196(Kar) where it was held as under:-

‘’When no expenditure is incurred by the assessee in earning the dividend income, no notional expenditure could be deducted from the said income. It is not the case of the assessee retaining any shares so as to have the benefit of dividend. 63 per cent of the shares, which were purchased, are sold and the income derived therefrom is offered to tax as business income. The remaining 37 per cent of the shares are retained. It has remained unsold with the assessee. It is those unsold shares which have yielded dividend, for which the assessee has not incurred any expenditure at all. Though the dividend income is exempted from payment of tax, if any expenditure is incurred in earning the said income, the said expenditure also cannot be deducted. But in this case, when the assessee has not retained shares with the intention of earning dividend income and the dividend income is incidental to its business of sale of shares, which remained unsold by the assessee, it cannot be said that the expenditure incurred in acquiring the shares has to be apportioned to the extent of dividend income and that should be disallowed from deductions. In that view of the matter, the approach of the authorities is not in conformity with the statutory provisions contained under the Act. Therefore, the impugned orders are not sustainable and require to be set aside.

We have considered the business activities, financial statements and judicial decisions, there seems to be a realistic approach on acquisition

ITA No.885/Mds/2015 :- 10 -: of shares by the assessee company and the above expenditure was incurred purely on the investment strategies of the Business.

Therefore, the ld. Assessing Officer should have considered the expenditure from the assessee business objects and activities and the calculate the disallowance under Sec. 14A Rule 8D. We, therefore are of the opinion that the disputed issue has to be re-examined in line with the investment activity by the ld. Assessing Officer and we set aside the order of the Commissioner of Income Tax (Appeals) to the file of the ld. Assessing Officer for examination and the assessee shall be provided adequate opportunity of hearing before passing the orders on merits and the ground of the assessee is allowed for statistical purpose.

8.1 The assessee company claimed loss as Short Term Capital Loss �14,00,00,000/- and the loss pertaining to forfeiture of warrants allotted to the assessee company which could not exercised within the stipulated time due to liquidity crisis and the loss is ITA No.885/Mds/2015 :- 11 -: chargeable under Capital Gains as per Sec. 48 of the Act. There is no sale consideration received by the assessee and ld. Authorised Representative explained that share warrants are purchased for �14,00,00,000/- and assessee company relinquished rights to buy shares of Shriram City Union Finance Limited and taken the consideration as Zero observed at page 5.1 of ld. Assessing Officer order as under:-

"Shriram City Union Finance Limited issued 35,00,000 warrants to us on 16.05.2008 convertible within 18 months from the date of allotment at the option of holder into equity shares of Rs. 10 each for cash at the rate of one equity for every warrant. We paid Rs.14,00,OO,OOO on 15.05.2008 i.e. Rs.40 for warrant. On conversion, we had to pay Rs.126,00,OO,000 (Rs.360 per warrant), As we could not raise 126,00,00,000 we relinquished our right to buy the shares of Shriram City Union Finance Limited, the consideration being zero. The amount already paid of Rs. 14,00,00,000 was forfeited. Therefore the amount already paid is only a loss. You have stated that in the absence of any value being assigned to the consideration received on transfer of warrants, the capital loss cannot be computed u/s 45 r.w.s.48 and hence we are not entitled to claim short term capital loss. We submit that we lost the amount invested as the option was not exercised and the balance amount was not paid. Hence the sale consideration has to be taken as "Zero", Therefore, we request that our claim may be allowed.’’ The ld. Assessing Officer considered the explanations and facts on allotment of share warrants and relied on the decisions of ITAT, Ahmedabad Bench in the case of Ajay C. Mehta vs. DCIT, 114 ITD 628 referred at page 9 to 11 of his order and concludes that the loss on ITA No.885/Mds/2015 :- 12 -: forfeiture of warrants is not Short Term Capital Loss and assessee company is not entitled for claim of loss of �14,00,00,000/- and disallowed the same. Aggrieved by the order, the assessee filed an appeal before Commissioner of Income Tax (Appeals).

8.2 In the appellate proceedings, the ld. Commissioner of Income Tax (Appeals) on the basis of the arguments of the ld. Authorised Representative on the grounds and findings of the ld. Assessing Officer and written submissions and other materials in the appellate proceedings observed at page 18 to 22 of his order at para 5.3.2 as under:-

‘’I have considered the findings of the AO and also the submissions of the AR of the appellant carefully. There is no dispute about the factual position brought by the AO in the order of assessment. The stand of the AR of the appellant that the consideration received on forfeiture of warrants to be taken as NIL is not acceptable. The appellant has not exercised the option and the warrants were lapsed and the assesee has not got any amount on account forfeiture of warrants. On the facts of the case, I am of the confirmed view that the appellant has not received any consideration on account of forfeiture of warrants. However, the AR of the appellant relied on the ratio of the decision of the Hon'ble Delhi High Court in the case of CIT v. Chand Rattan Bagri [329 ITR 356] and ratio of the decision of the Kanataka High Court in the case of DCIT v. BPL Sanyo Finance Ltd. [312 ITR 63]. On the other hand, the AO relied upon the ratio of the decision of the Honble ITAT, Ahmadabad "B" Bench in the case of Ajay Singh Mehta v. DCIT [114 ITD 628]. In the case cited by the AO, the Hon'ble ITAT Ahmadabad 'B' Bench, relied upon the ratio of the decision of the Supreme Court of India in the case of CIT v. B.C. Srinivasa Setty [1981] [128 ITR 294] in coming to the view that assessee will not be entitled to claim the deduction under short term capital loss in the absence of value being assigned to the consideration

ITA No.885/Mds/2015 :- 13 -: received on transfer of warrants for the purpose of computation of capital gains u/s.48 of the I. T. Act. The ratio of the decisions relied upon by the AR of the appellant are not applicable to the facts of the present case as the decisions rendered by High Court of Karnataka and High Court of Delhi cited supra, did not consider the ratio of the decision rendered by Supreme Court of India in the case of CIT v. B.C.Sreenivasa Setty [1981] [128 ITR 294]. There being no jurisdictional Tribunal or High Court decision on this issue, I am of the considered view that the AO-rs legally correct in coming to the conclusion that the claim of the assessee towards short term capital loss is not allowable’’ and dismissed the ground of the assessee. Aggrieved by the Commissioner of Income Tax (Appeals) order, the assessee assailed an appeal before Tribunal.

8.3. Before us, the ld. Authorised Representative argued the grounds and explained that the loss is on account of forfeiture of warrants and assessee has claimed the sale consideration as Nil.

Further, the loss is due to non exercise of right for allotment of shares.

Prime facie, the assessee has purchased warrants of Group Companies and paid �14,00,00,000/- but could not pay balance amount within the stipulated period due to financial constrains and loss was claimed as Short Term loss and relied on the judicial decisions and prayed for allowing the appeal.

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8.4 Contra, ld. Departmental Representative relied on the orders of Commissioner of Income Tax (Appeals) and vehemently opposed to the grounds.

8.5 We heard the rival submissions, perused the material on record and judicial decisions. The crux of the issue being claim of Short Term Capital Loss on account of forfeiture of warrants. The ld. Authorised Representative emphasized that the loss on account of forfeiture of warrant for non payment of money because of failure to pay is allowable as Short Term Capital Loss even though there is no transfer and relied on the judicial decisions of Karnataka High Court of DCIT vs. BPL Sanyo Finance Limited (312 ITR 63) and supported the case with decision of CIT vs. Chand Ratan Bagri 329 ITR 356 (Delhi High Court) and the Co-ordinate Bench decision of the Tribunal on forfeiture of shares in the case of K.P.D. Sigamani, Shri. K.P.

Ramasamy and Shri. P Nataraj vs. ACIT in in assessment year 2007-2008, dated 30.07.2010 were the Tribunal held and gave a finding that the assessee is entitled to claim Short Term Capital Loss, on account of forfeiture of shares, if it is not sham or colourable device. We perused the assessment order and Commissioner of Income Tax (Appeals) orders on the transaction of forfeiture of share warrants of the Group company. The ld.

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Authorised Representative drew our attention to the Audited financial statements of the Shriram City Union Finance Limited as on 31.03.2010 and share warrant certificate. The fact of the share warrant conversion forfeiture was referred in the Directors report at page 11 as under:-

‘’As approved by the Extraordinary General Meeting, optionally convertible warrants were issued to various subscribers in the years, 2008. In November, 2009 all the subscribers except Shriram Retail Holdings Pvt. Ltd (SRHPL) exercised their option and converted the warrants into equity shares at a price of ₹400/- per share (₹40/- on allotment and balance on conversion of warrants into equity shares). The non conversion of warrants into shares by SRHPL resulted in forfeiture of money paid by them’’.

Further, the ld. Authorised Representative drew our attention to the page 44 of the Annual Report at Schedule 3 ‘’Reserves and Surplus’’ were the forfeiture amount of optionally convertible warrants were transferred to Capital Reserve. Normally authorities concerned shall proceed on the basis of the professed intention of the parties to a document/ transaction /arrangement. If that is under doubt or disputed or challenged, then the authorities have the power to find out the real intention of the parties by removing facade to expose their real intention cleverly cloaked and if that intention is discovered to be evasion of tax, it cannot be given effect to merely because of steps taken as component parts of arrangement are legally correct or valid.

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All documents or transactions have to be given effect to even though they resulted in reduction of tax liability, provided that they are genuine and bona fide and it cannot be called as colourable device. In case, a transaction took place with the sole intention to defraud Revenue and that resulted in deduction of tax liability, it can be called as a dubious method followed by the assessee, as the parties involved therein have no right to indulge any tax evasion and it cannot be taken away by any judgment of the Court. This has to be considered and in fairness, it should be appreciated that all transactions, which resulted in evasion of tax liability, can be considered as a device or subterfuge or colourable transaction. We found on perusal of the share warrant certificate and the financial statements and the assessment order, the ld. Assessing Officer in his order is silent on this transaction of financial statement of Shriram City Union Finance Limited and accounting system. Therefore, we set aside order of the Commissioner of Income Tax (Appeals) order and remit the disputed issue to the file of ld. Assessing Officer for re-examination based on the information submitted on warrants and financial statement of Shriram City Union Finance Limited and the Assessing Officer shall pass the order on merits after providing opportunity of being heard in accordance with law. The ground of the assessee is allowed for statistical purpose.

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The last ground raised by the assessee is that the ld. 9.

Commissioner of Income Tax (Appeals) erred in confirming the disallowance u/s.14 while computing Book profit u/s.115JB of the Act.

9.1 The ld. Assessing Officer while calculating Book profits u/s.115JB of the Act found that the assessee received dividend income of �3,34,37,502/- and disallowance u/sec. 14A r.w.s. Rule 8D was calculated at �1,42,83,969/- was added while calculating Book Profits and assessee company. Aggrieved the assessee has filed an appeal before Commissioner of Income Tax (Appeals).

9.2 The ld. Commissioner of Income Tax (Appeals) confirmed the action of the ld. Assessing Officer of disallowance of Sec 14A expenditure while calculating Bok profits. Aggrieved by the Commissioner of Income Tax (Appeals) order, the assessee assailed an appeal before Tribunal.

9.3 Before us, the ld. Authorised Representative argued that the disallowance u/s.14A r.w.r. 8D of the Act is disputed and being challenged. Further, the provisions of Sec. 115 JB of the Act are inclusive provisions and Addition in the assessment proceedings to returned income shall not be added for calculating the Book profits and prayed for allowing the appeal.

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9.4 Contra, ld. Departmental Representative relied on the orders of Commissioner of Income Tax (Appeals) and vehemently opposed to the grounds.

9.5 We heard the rival submissions, perused the material on record and judicial decisions. The contention of the ld. Authorised Representative that the disallowance should not be considered for computation of Book Profit u/s.115JB. Similar issue was decided by the Bangalore Bench of Tribunal in the case of Manipal Technologies Ltd. vs. DCIT, in dated 25.07.2014 wherein it was held as under:-

‘’4. As regards the addition of disallowance u/s.14A of the Act, while computing the book profit u/s.115JB of the Act is concerned, the learned counsel for the assessee has placed reliance upon the decision of the ‘D’ Bench of the Tribunal at Mumbai in the case of Reliance Industrial Infrastructure Ltd vs. Add. CIT in & 70/Mum/2009, dated 05.04.2013 wherein, by following the decision of the Delhi Bench of the Tribunal in the case of Goetze (India) Ltd, it was held that while computation of adjusted book profits, the provisions of Sec. 14A cannot be imported in the clause (f) of the Explanation to Sec. 115JB of the Act. Copy of the said order is produced before us.

Learned Departmental Representative, Shri. Balakrishnan, on the other hand, supported the orders of the authorities below.

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We respectfully following the above decision of the Tribunal, direct the ld. Assessing Officer to exclude addition u/sec. 14A for calculating of Book profit u/s.115JB of the Act and allow the appeal of the assessee.

Order pronounced on Wednesday, the 10th day of August, 2016, at Chennai.