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

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

The appeal filed by the assessee is directed against order

of the Commissioner of Income-tax (Appeals)-15, Chennai in ITA

No.395/A-15/13-14, dated 18.02.2015 for the assessment year 2010-

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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.

business of dealing in shares and stocks and filed Return of income on

15.10.2010 admitting total income of �2,53,25,000/- after setting off

of brought forward business loss of �1,95,76,595/-. The assessee

filed revised Return of income on 29.09.2011 admitting total income of

�1,10,92,230/- after claiming set off of brought forward business of

earlier years. The Return of income was processed u/s.143(1) of the

Act and case was selected for scrutiny and notice u/s.142(1) and

143(2) of the Act were issued. In compliance to notices, the ld.

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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

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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

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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

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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 ITA No.638/Mds/2012,

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

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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

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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 ITA No.981/Mds/2013 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

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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.

(Appeals) erred in confirming the action of ld. Assessing Officer in

rejecting the assessee’s claim of Short Term Capital Loss of

�14,00,00,000/- on claim of forfeiture of warrants.

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

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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

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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

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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 ITA No.412/Mds/2010 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 ITA No.1222/Bang/2012 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 ITA Nos. 69 & 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.

Sd/- Sd/- (चं� पूजार�) (जी. पवन कुमार) (CHANDRA POOJARI) (G. PAVAN KUMAR) �या�यक सद�य/JUDICIAL MEMBER लेखा सद�य /ACCOUNTANT MEMBER चे�नई/Chennai �दनांक/Dated:10.08.2016 KV आदेश क� ��त�ल�प अ�े�षत/Copy to: 1. अपीलाथ�/Appellant 3. आयकर आयु�त (अपील)/CIT(A) 5. �वभागीय ��त�न�ध/DR 2. ��यथ�/Respondent 4. आयकर आयु�त/CIT 6. गाड� फाईल/GF