ITO, WARD - 1(3), KOLKATA, KOLKATA vs. M/S. ATN INTERNATIONAL LIMITED, KOLKATA

Hence, based on income criteria, the ld AO came to a conclusion that the main income of the assessee is under the head ‘income from business’ and accordingly the loss from trading in shares would fall under the ambit of Explanation to Section 73 of the Act and hence treated the loss thereon as speculation loss. The ld AO also observed that the main business of the assessee is not business of giving loans and advances which is apparent from the application of funds as under:-

Own funds (shareholders funds) - Rs. 39.87 crores Loan funds - Rs. 12.17 crores Application of Funds Fixed Assets - Rs. 15.16 crores Investment in Shares and Securities - Rs. 21.58 crores Loans & Advances - Rs. 13.58 crores Out of loans and advances for Rs. 13.58 crores, no interest is accounted for by the assessee. Accordingly, he concluded that giving interest free advance is not part of business of giving loans and advances and hence not eligible for exception pointed out in the Explanation to Section 73 of the Act. When assessee was show caused in this regard, the assessee replied

3 & 1532/Kol/2011 ATN International Ltd, AY 2004-05 that it had purchased and sold the shares on delivery basis and had not entered into any speculative transaction. The assessee also placed reliance on the decision of the Hon’ble Karnataka High Court in the case of Mysore Rolling Mills (P) Ltd vs CIT reported in 195 ITR 405 (Kar) wherein it was observed that unless it is conclusively established that the assessee entered the transactions clearly as a speculative nature, the courts cannot infer the transactions to be ventured only because the assessee derived subsequently the benefit of reduction of tax. Further attention was also drawn to the CBDT Circular No. 204 dated 24.7.1976 which clearly stated that the object of Explanation to Section 73 of the act was to curb the devices resorted by the controlling group of companies to manipulate and reduce the taxable income of companies under their control. In the instant case, the assessee has not dealt with the shares of group companies and accordingly the provisions of Explanation to Section 73 of the Act cannot be made applicable. The ld AO not being convinced with this argument of the assessee, sought to treat the loss from trading of shares of Rs. 85,84,968/- as speculation loss in the assessment.

3.2. The ld CITA deleted the disallowance by stating that the provisions of Explanation to Section 73 of the Act were brought in the statute book only to curb the devices resorted by the assessees to reduce the taxable income by manipulating with the shares of companies under their control. He observed that this was fully explained in the CBDT Circular No.204 dated 24.7.1976 which is binding on the tax authorities. Aggrieved, the revenue is in appeal before us on the following ground:- “1. That on the facts and in the circumstances of the case Ld. CIT(A) has erred in directing to treat the speculation loss of Rs.85,84,968/- as business loss on the basis of CBDT’s Circular No.204 dated 24.07.1976 when the said Circular is not squarely applicable in the present case.”

3.3. The ld AR at the outset argued that this appeal of the revenue is to be dismissed due to low tax effect as according to him, the ld AO had merely shifted the loss from trading in shares from business loss to speculation loss without disturbing the figures thereon. He allowed the speculation loss also to be carried forward to subsequent years. Barring this one, the other two additions made by the ld AO does not have tax effect of more than Rs 10 lacs and hence in view of the recent circular no. 21/2015 dated 10.12.2015, the appeal of the revenue is to be dismissed as not maintainable. The ld DR argued that the circular quoted by the ld AR clearly states that the tax effect is to be calculated on the disputed issues raised 3.4. We have heard the rival submissions. We find that the bare reading of the circular no. 21/2015 dated 10.12.2015 states that the tax effect on the disputed issues are to be looked into. Hence we are convinced that the tax effect is more than Rs 10 lacs taking into account the disputed issues before us. Hence we dismiss the arguments of the ld AR and hold that the appeal of the revenue is maintainable.

3.5. On merits of the addition, the DR argued that the CBDT Circular No. 204 dated 24.7.1976 relied upon by the ld CIT(A) is not warranted in view of the fact that the assessee’s case does not fall under the exception to Explanation to Section 73 of the Act based on income criteria, as the entire income is only from business. Moreover, the case law relied upon by the assessee in the case of Mysore Rolling Mills (P) Ltd vs CIT reported in 195 ITR 405 (Kar) is also not applicable to the facts of the instant case, as the question before the Hon’ble Karnataka High Court was whether the assessee was a trader or investor. He placed reliance on the decision of the Hon’ble Calcutta High Court in the case of CIT vs Arvind Investments Ltd reported in (1991) 58 taxman 216 (Cal) wherein it was held that the language of Explanation to Section 73 of the Act merely indicates that the business activity which consists of purchase and sale of shares will be treated as speculation business. If the entire business activity of a company consists of purchase and sale of shares of other companies, then the entire business will be treated as speculation business. Accordingly he argued that the ld AO is right in treating the loss from trading in shares as Speculation loss.

3.6. In response to this, the ld AR argued that the assessee has got own funds of Rs. 39.87 crores and Investments held as Stock in Trade were to the extent of Rs. 21.58 crores. Hence on fund deployment criteria, it could be concluded that the assessee is engaged in the Principal Business of Trading in Shares as more than 50% of the capital is invested in shares. He argued that the amendment brought to this effect in Explanation to Section 73 of the Act w.e.f. 1.4.2015 has been held to be retrospective in operation by the following decisions of the co-ordinate benches of various tribunals :-

5 & 1532/Kol/2011 ATN International Ltd, AY 2004-05 (a) Kolkata Tribunal in the case of DCIT vs Raima Equities Pvt Ltd in ITA No. 1994/Kol/2013 dated 11.8.2016 (b) Ahmedabad Tribunal in the case of ITO vs Union India Ltd in ITA No. 1240/Ahd/2012 dated 22.6.2016 (c) Mumbai Tribunal in the case of Fiduciary Shares & Stock P Ltd vs ACIT in ITA No. 321/Mum/2013 dated 13.5.2016 By placing reliance on the aforesaid decisions, he pleaded that the loss from trading in shares would fall under the exception provided in Explanation to Section 73 of the Act and hence the same need not be treated as Speculation Loss.

3.7. We have heard the rival submissions. We hold that it is not in dispute that the principal business of the assessee is trading in shares. We find that the amendment was brought by Finance Act 2014 w.e.f. 1.4.2015 by insertion of the expression – principal business of which is the business of ‘trading in shares’ or banking ………… in Explanation to Section 73 of the Act. It would be pertinent to refer to the recommendations of Wanchoo Committee Report of December 1971 pursuant to which the Explanation to Section 73 of the Act was inserted by the Taxation Laws (Amendment) Act, 1975 w.e.f. 01.04.1977, the relevant portion of which is extracted hereunder:- “A tax avoidance device often resorted to by business houses controlling groups of companies is manipulation of results from dealings in shares of the companies controlled by them. In our opinion, such manipulation in share dealings for the purpose of tax avoidance can be checked effectively if the results of dealings in shares by such companies are treated for tax purposes in a manner analogous to speculation. No doubt, companies whose main business activities centre around investment in shares will have to be left out. Accordingly, we recommend that the results of dealings in shares by companies, other than investment, banking and finance companies, should be treated in a manner analogous to speculation business.”

3.7.1. We find that in order to achieve the real objective of curbing tax avoidance methods resorted to by business houses controlling their group companies, the legislature by inserting an amendment to Explanation to Section 73 of the act by Finance Act 2014, has extended the exception carved out in the Explanation by putting all the companies, the principal business of which is the business of trading in shares into the exception. We find that the amendment brought in by the Finance Act 2014 in Explanation to Section 73 of the 6 & 1532/Kol/2011 ATN International Ltd, AY 2004-05 Act appears to be made in order to clarify the real intention behind the insertion thereof, by removing the obvious hardship caused to various assessees whose main business in trading in shares. The amendment has removed the anomaly and brought the ambit of the Explanation to Section 73 of the Act in line with the intention of the legislature by placing the companies whose principal business is trading in shares as part of the exception to Explanation to Section 73 of the Act, because such companies were not the companies for whom the Explanation was inserted.

3.7.2. We find that though this amendment is made effective only from Asst Year 2015-16 onwards, the real intention behind introduction of this amendment, in our opinion, is curative in nature. In our considered opinion, the amendment, if not held retrospective, would result in hardship to the assessee in the following manner:-

(a) The assessee engaged in trading of shares would be treated as speculation business upto Asst Year 2014-15. That assessee might be having losses eligible to be carried forward under the head ‘speculation business’.

(b) The provisions of section 73 of the Act provides that the brought forward speculation loss could be set off only against speculation profits.

(c ) Pursuant to the amendment by Finance Act 2014 supra, the loss derived from the principal business of trading in shares would not be construed as speculative in nature. The logical corollary is profit derived thereon also would be treated only as normal business profits and not speculative profits.

(d) In this situation, the brought forward speculation loss could never be eligible to set off against the profits when there is absolutely no change in the business activities of the assessee (i.e trading in shares as its principal business) . That loss would get lapsed for no fault of the assessee thereby creating genuine hardship to the assessee. We feel that the insertion in Explanation to Section 73 of the Act by the Finance Act 2014 should be looked into from this perspective which would create genuine hardship to the assessee if not held to be curative in nature. Hence we hold that the said amendment should be given retrospective

7 & 1532/Kol/2011 ATN International Ltd, AY 2004-05 effect only. In our considered opinion, the amendment would not serve its object in the instant case unless it is construed retrospective in operation.

3.7.3. We also draw support from the following decisions of the Hon’ble Apex Court in this regard :- CIT vs Alom Extrusions Ltd reported in 319 ITR 306 (SC) Allied Motors Pvt Ltd vs CIT reported in 224 ITR 677 (SC) CIT vs J.H.Gotla reported in (1985) 156 ITR 323 (SC) at page 339 and 340 3.7.4. We also find that similar view has been taken by the co-ordinate benches of Ahmedabad , Mumbai and this Tribunal supra as rightly pointed out by the ld AR. Respectfully following the judicial precedents relied upon hereinabove, Wanchoo Committee report of December 1971 and our findings given hereinabove , we hold that the amendment brought in by the Finance Act 2014 should be construed as curative in nature and hence to be given retrospective applicability. It is not in dispute that the principal business of the assessee in the instant case is trading in shares. If the amendment supra is given retrospective effect, then the same would automatically fall under the exception provided in the Explanation to Section 73 of the Act and accordingly the loss incurred on delivery based share transactions should not be construed as speculation loss. In view of this, we are not inclined to get into the other arguments advanced by the ld AR and ld DR on the merits of the case. Hence, ground no. 1 raised by the revenue in this regard is dismissed.

4. The next issue to be decided in this appeal of the revenue is as to whether the ld CITA is justified in deleting the disallowance made u/s 43B of the Act in the sum of Rs. 7,25,444/- in the facts and circumstances of the case.

4.1. The brief facts of this issue is that the ld AO observed that the assessee had claimed deduction towards interest to Syndicate bank in the sum of Rs. 7,25,444/- against settlement of dues. The assessee furnished documentary evidences such as copies of proposal dated 13.9.2003, ledger account of the bank together with the bank statement thereon. The ld AO however was not satisfied with the explanation given and disallowed the sum of Rs.

8 & 1532/Kol/2011 ATN International Ltd, AY 2004-05 7,25,444/- u/s 43B of the Act for want of relevant interest certificate from the bank to justify the payment made by the assessee. Before the ld CITA, the assessee reiterated the submissions and furnished the same evidences and argued that if the ld AO had any apprehension or doubt about the documents submitted before him, he ought to have made necessary enquiries directly from the bank u/s 133(6) or 131 of the Act and assessee cannot be denied the benefit of deduction when the interest component has been duly paid to the bank. The ld CITA convinced with the arguments of the assessee deleted the disallowance made thereon u/s 43B of the Act. Aggrieved, the revenue is in appeal before us on the following ground:- “2. That on the facts and in the circumstances of the case Ld. CIT(A) has erred in deleting the addition of Rs.7,25,444/- u/s. 43B when assessee failed to prove that the amount was actually paid within the time allowed u/s. 139(1).”

4.2. The ld DR stated that whether the assessee had indeed made payment to Syndicate Bank may kindly be directed to be verified by the ld AO in order to arrive at the correct picture. The ld AR fairly agreed for the same.

4.3. We have heard the rival submissions. The issue involved only requires factual verification from the bank statement and the loan account of the assessee as to whether out of total settlement of dues made by the assessee, whether the interest component had been duly paid or not. Based on this factual verification, the ld AO is directed to decide the issue in accordance with law. Accordingly, ground No. 2 raised by the revenue is allowed for statistical purposes.

5.1. The brief facts of this issue is that the ld AO observed that the interest income is not shown by the assessee on all the loans and advances given by it and whereas the assessee has been paying interest on the loans borrowed by it. The assessee was show caused to this effect. The assessee replied stating that out of the loan amount of Rs. 13.54 crores, excepting the advances made to the three parties namely (i) M/s ATN Films Ltd ; (ii) M/s

9 & 1532/Kol/2011 ATN International Ltd, AY 2004-05 Galaxy Television Ltd and (iii) M/s Girnar Fibers Ltd, all the advances had been made after the financial year 1996-97, whereas the Fixed Deposits received from public and the loan received from Syndicate Bank are prior to 31.03.1997. In respect of the advances shown in the names of the said three companies, a separate self-explanatory note along with copies of special resolution passed by the company and the order of the Hon’ble High Court of Calcutta were filed. It was accordingly submitted that the interest bearing funds were not utilized by the assessee company for giving interest free loans or advances, no adverse view should be taken in that regard. In support of this, the assessee also placed plethora of judgements to its support. The ld AO however proceeded to disallow the interest proportionately treating the borrowed funds as diverted for giving interest free advances. The ld CITA however deleted the disallowance of interest by giving a finding that no part of the interest bearing fund was utilized for providing interest free loans or advances and accordingly the interest paid on borrowed capital amounting to Rs. 14,05,745/- need not be disallowed. Aggrieved, the revenue is in appeal before us on the following ground:- “3. That on the facts and in the circumstances of the case Ld. CIT(A) has erred in deleting the addition of Rs.14,05,745/- being interest on borrowed capital which was utilized for interest free loans and advances to different parties including relatable parties when assessee did not discharge its onus to show that interest bearing loans were utilized for purposes other than giving interest free loans and advances.”

5.2. The ld DR argued that the assessee did not prove the business expediency of advancing interest free funds to three companies and hence vehemently relied on the order of the ld AO. In response to this, the ld AR argued that the advances made to three companies were purely related to the business of the assessee as they were also involved in the same line of business in which assessee was engaged and hence the business nexus / expediency has been proved beyond doubt. From the perusal of the balance sheet, it could be seen that the assessee had got sufficient own funds at its kitty which is much less than the borrowed funds and hence there is no question of disallowing the interest. He also placed reliance on the decision of the Hon’ble Jurisdictional High Court in the case of CIT vs Britannia Industries Ltd reported in (2006) 280 ITR 525 (Cal) in support of his contentions.

5.3. We have heard the rival submissions. It is not in dispute that the entire details of amount of interest free funds paid to three companies were duly filed before the ld AO by the assessee. The ld CITA had given a categorical finding that no part of the borrowed

10 & 1532/Kol/2011 ATN International Ltd, AY 2004-05 funds were utilized for advancing interest free funds by the assessee. This fact has not been controverted by the revenue before us. Hence the primary test for disallowance of interest that borrowed funds have been diverted for non business purposes fails. We find from the annual report of the assessee company that the assessee is having sufficient own funds which is several times more than the borrowed funds and the amounts advanced to three companies. It is well settled that when there are mixed funds (i.e both borrowed as well as own funds) and when the own funds are several times more than the borrowed funds and interest free advances, then it should be presumed that the interest free funds were advanced by the assessee from its own funds. Reliance in this regard placed by the ld AR on the decision of the Hon’ble Calcutta High Court in the case of CIT vs Britannia Industries Ltd reported in (2006) 280 ITR 525 (Cal) is very well founded and is directly on the point. We also find that similar view has also been taken by the Hon’ble Bombay High Court in the case of CIT vs Reliance Utilities and Power Ltd reported in 313 ITR 340 (Bom). Respectfully following the aforesaid judicial precedents , we hold that there is no justifiable reason to interfere with the order of the ld CITA in this regard. Accordingly, ground no. 3 raised by the revenue is dismissed.

8.1. The brief facts of this issue is that the ld AO observed that during the previous year relevant to assessment year 2004-05 the assessee had transferred the tangible and intangible

11 & 1532/Kol/2011 ATN International Ltd, AY 2004-05 assets and liabilities of the business in the name of “Ahimsaa Channel” to its subsidiary company in the name of M/s. Ahimsaa Global Media Ltd. in terms of the agreement dated 20.03.2004 at a consideration of Rs.195 lakh and the consideration was received by the assessee in the form of 39,00,000/- fully paid shares of the said subsidiary company @ Rs.5/- per share. The Ahimsaa Channel had been launched by the assessee in the FY. 2003- 04 and the same was disposed off by the assessee in the financial year 2003-04 to the said subsidiary company. The following assets belonging to Ahimsaa Channel run by the assessee were transferred to its subsidiary company M/s Ahimsaa Global Media Ltd :-

Computers 74,450 Media Equipments 52,18,510 Office Equipments 65,080 Vehicles 6,98,379 Preoperative Expenses Capitalised 1,28,23,581 Preliminary Expenses 6,20,000 ------------------ 1,95,00,000 The assessee being a holding company stated that it acquired all these assets and incurred capital expenditure which were capitalized during the year under appeal and the same were transferred at book values to its subsidiary company during the year under appeal. Accordingly, both the assets added and transferred/sold were not reflected in the depreciation schedule of the assessee as it had no impact on the calculation of depreciation. The assessee stated that this transfer was without any profit. In any case, it was claimed that the transfer of assets by holding company to its subsidiary company shall not be regarded as transfer in terms of section 47(iv) of the Act. But the ld AO not convinced with this contention stated that since the value of transferred assets to the tune of Rs. 60,56,419/- were not deducted by the assessee in the depreciation schedule, it had claimed excess depreciation of Rs. 15,05,244/- and accordingly the same was disallowed. He also observed that the sum of Rs. 1,28,23,581/- for transfer of preoperative expenses would become income derived from transfer of the same being excess of assets over liabilities and therefore taxable as income u/s 28 of the Act. He held that assessee became the holding company of the subsidiary on 28.1.2004 and during the next Asst Year 2005-06, the assessee ceased to be the holding company of the subsidiary on disposal of the shares of the 12 & 1532/Kol/2011 ATN International Ltd, AY 2004-05 subsidiary. Therefore he observed that the income of Rs. 1,28,23,581/- derived from the transfer of the said assets and accordingly added the same to the total income of the assessee.

8.2. Before the ld CITA, the assessee stated that the assessee launched its satellite TV channel, Ahimsaa on 2.10.2003 and subsequently the channel was transferred to its subsidiary Ahimsaa Global Media Limited on 20.3.2004 for consideration of Rs. 1,95,00,000/- by way of allotment of 39 lacs fully paid equity shares of Rs 5 each of Ahimsaa Global Media Limited. It was reiterated that the consideration by way of transfer of channel received by way of allotment of equity shares was exactly the cost of fixed assets purchased by assessee on or after 1.4.2003 and also the expenses incurred as per preoperative expenses for launching the channel. All these facts were directly verifiable from the annual report of the assessee which was filed before the ld CITA as well as before the ld AO. It was argued that the total movable fixed assets worth Rs 60,56,419/- were not debited to profit and loss account by the assessee but were capitalized in the books of accounts. Similarly the preoperative expenses of Rs. 1,28,23,581/- incurred by the assessee for various expenses in respect of launching Ahimsaa Channel till the date of launch and preliminary expenses of Rs. 6,20,000/- were capital in nature and were added to the cost of channel along with other fixed assets. It was reiterated that since the fixed assets were purchased during the financial year and also transferred during the same year, it did not appear in the block of assets and no depreciation was claimed on said fixed assets by the assessee. The depreciation of Rs. 37,46,228/- claimed were only in respect of assets and other equipments acquired for its other channel ATN WORD which is clearly reflected in the depreciation schedule itself. It was further stated that the assessee did not receive any income as the cost of equipments on which no depreciation was charged and expenses incurred with channel were received by way of allotment of equity shares and no surplus whatsoever was earned by the assessee. The ld CITA deleted the additions by making the following observations:- “Taking into the account the circumstance and facts as narrated, it is apparent that no profit could have arisen to the company in the way of ‘transfer of assets’ or ‘excess depreciation’. The addition deserve to be deleted and on merits these grounds are allowed.”

8.3. Aggrieved, the revenue is in appeal before us on the following ground:-

13 & 1532/Kol/2011 ATN International Ltd, AY 2004-05 “That on the facts and in the circumstances of the case Ld. CIT(A) has erred in deleting the addition of Rs.15,05,244/- on account of disallowance of depreciation related to transferred assets and addition of Rs.1,28,23,581/- on account of business profit by simply accepting assessee’s arguments when assessee submitted nothing in these regards. Ld. CIT(A) has also erred in law for failure to remand the matter for verification.”

8.4. The ld DR vehemently relied on the order of the ld AO and prayed for verification of these facts by the ld AO as proper examination of the same were not carried out by the ld AO in the instant case. In response to this, the ld AR reiterated the submissions made before the lower authorities and relied on the order of the ld CITA.

8.5. We have heard the rival submissions. The facts stated hereinabove are not narrated for the sake of brevity. We find that the assessee had clearly mentioned the following in its Significant Accounting Policies and Notes on Accounts attached along with the printed annual report vide page 65 as below:-

(a) All Fixed Assets are accounted for at cost inclusive of legal and / or installation and incidental expenses less depreciation. (b) Depreciation on all assets has been provided on straight line basis as per rates prescribed under Schedule XIV of the Companies Act, 1956 except on Office Premises, Wind Power Project, assets of Ahimsaa Global Media Limited in Ahimsaa Channel where depreciation has not been charged.

We are thoroughly convinced from the facts narrated above that there was no surplus that was derived in any manner whatsoever by the assessee warranting chargeability to tax. In any case, we are in complete agreement with the arguments of the ld AR that the transfer of assets by holding to subsidiary company would fall under the exemption clause provided in section 47(iv) of the Act and hence the same, in any event, would not be regarded as ‘transfer’ within the meaning of section 2(47) of the Act. We find from the facts narrated above, the assessee had only added the fixed assets pertaining to Ahimsaa Channel during the year under appeal including the capitalization of preoperative and preliminary expense relating to the channel and transferred the same at book values / cost to its subsidiary company. There is no profit element derived from it. Hence we hold that there is no case for making any addition towards excess depreciation or profit derived from excess of assets over liabilities. We find that the ld CITA had rightly granted relief by duly appreciating the 14 & 1532/Kol/2011 ATN International Ltd, AY 2004-05 facts of the case. Hence we find no infirmity in the order of the ld CITA. Accordingly, the ground raised by the revenue in this regard is dismissed.

Order pronounced in the open court on 05.10.2016