Uri Holdings Pvt. Ltd., Ahmedabad V. The Dy. CIT, Circle-4(1)(1), Ahmedabad

ITA 2418/AHD/2015

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 8654 (ITAT-AHMEDABAD)
• Duration Of Justice: 2 year(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-08-2017
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: Not Allotted
• Assessment Year: 2005-2006
• Appeal Filed On: 13-08-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Capital asset; Search and seizure; Notional interest
• Section: 143(3); 2

Judgement Text

I.T.A. NO S . 2 417 & 2418 /AHD/201 5 ASSESSMENT Y EARS: 20 04 - 05 & 2005 - 06 PAGE 1 OF 5 IN THE INCOME TAX APPELLATE TRIBUNAL, AHMEDABAD SMC BENCH, AHMEDABAD [CORAM : PRAMOD KUMAR AM ] I.T.A. NO S . 2417 & 2418 /AHD/201 5 ASSESSMENT Y EAR S : 20 04 - 05 & 2005 - 06 URI HOLDINGS PVT. LTD. ....... ...........APPELLANT NIRMA HOUSE , ASHRAM ROAD, AHMEDABAD 380 009. [PAN : AAA CU 1649 J ] VS. DY. COMMISSIONER OF INCOME TAX, CIRCLE 4(1)(1) , AHMEDABAD. ............................RESPONDENT APPEARANCES BY: HEMANSHU SHAH FOR THE APPELLANT KEYUR PATEL FOR THE RESPONDENT DATE OF CONCLUDING THE HEARING : 17.08 .2017 DATE OF PRONOUNCING THE ORDER : 21 . 08 . 2017 O R D E R 1. TH ESE TWO APPEAL S FILED BY THE ASSESSEE APPELLANT ARE DIRECTED AGAINST TWO SEPARATE ORDER S , BOTH DATED 19 TH FEBRUARY 2009, PASSED BY THE LEARNED CIT(A), IN THE MATTER OF ASSESSMENT UNDER SE CTION 143(3) OF THE INCOME TAX ACT, 1961, FOR THE ASSESSMENT YEAR S 200 4 - 05 & 200 5 - 06. 2. THE COMMON G RIEVANCES RAISED IN THESE APPEALS ARE AS FOLLOWS : - 1. IN LAW AND IN FACTS AND CIRCUMSTANCES OF THE APPELLANT S CASE, THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) HAS ER RED IN POINTS OF LAW AND FACTS. 2 . IN LAW AND IN FACTS AND CIRCUMSTANCES OF THE APPELLANT S CASE, THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) HAS ERRED IN CONFIRMING ADDITION OF RS.27,71,919/ - (RS.29,43,385/ - FOR A.Y. 2005 - 06) NOTIONAL INTEREST ON OPTIONALLY FULLY CONVERTIBLE PREM IUM NOTES (OFCPNS) OF NIRMA INDUSTRIES LTD. I.T.A. NO S . 2 417 & 2418 /AHD/201 5 ASSESSMENT Y EARS: 20 04 - 05 & 2005 - 06 PAGE 2 OF 5 3. LEARNED REPRESENTATIVES FAIRLY AGREE THAT THE ISSUE IS NOW COVERED, IN FAVOUR OF THE ASSESSEE, BY A DIVISION BENCH ORDER DATED 21.06.2013 IN ASSESSEE S OWN CASE FOR THE ASSESSMENT YEAR 2003 - 04 WHEREIN THE TR IBUNAL HAS HELD AS FOLLOWS : - 2.8.4 WE HAVE CONSIDERED THE RIVAL SUBMISSIONS, PERUSED THE MATERIAL ON RECORD AND HAVE GONE THROUGH THE ORDERS OF AUTHORITIES BELOW. WE FIND THAT ADMITTEDLY, THE INCOME WAS OFFERED BY THE ASSESSEE ITSELF VIDE LETTER D ATED 11.08.2004 ALTHOUGH UNDER PROTEST AND THIS IS ALSO TRUE THAT THIS ISSUE WAS NEVER RAISED BEFORE THE AUTHORITIES BELOW AND THE SAME IS RAISED BEFORE US BY WAY OF THIS ADDITIONAL GROUND. IDEALLY, IN SUCH A SITUATION, WE GENERALLY RESTORE BACK THE ISSUE TO THE FILE OF LD. CIT (A) OR TO THE A.O. FOR THEIR DECISION FIRST. BUT IN THE PECULIAR FACTS OF THE PRESENT CASE, AS PER WHICH A LEGAL ISSUE HAS TO BE DECIDED AS TO WHETHER AS PER THE TERMS OF OFCPN OF NIRMA INDUSTRIES LTD., IT CAN BE SAID THAT ANY INCOME IS ACCRUING ON YEAR TO YEAR BASIS OR NOT, WE FEEL THAT SINCE THE TERMS OF ISSUE ARE VERY MUCH AVAILABLE BEFORE US AND THE SAME WERE AVAILABLE BEFORE THE AUTHORITIES BELOW ALSO, THE ISSUE CAN BE DECIDED AT OUR LEVEL AND, THEREFORE, IT IS NOT NECESSARY THAT WE MUST RESTORE BACK THIS ISSUE TO THE FILE OF THE A.O. /LD. CIT(A). HENCE, WE PROCEED TO DECIDE THIS ISSUE AFTER CONSIDERING THE FACTS AS PER THE ISSUE DETAILS OF OFCPN OF NIRMA INDUSTRIES LTD. AVAILABLE ON PAGES 7 - 14 OF THE PAPER BOOK AND AFTER CONSIDER ING THE ARGUMENTS OF BOTH THE SIDES. 2.8.4 AS PER THE ISSUE DETAILS OF THESE OFCPNS OF NIRMA INDUSTRIES LTD. AVAILABLE ON PAGE 7 OF THE COMMON PAPER BOOK, WE FIND THAT THE ISSUE PRICE OF THESE DEBENTURES WAS RS.25000 EACH HAVING FACE VALUE OF RS.3375 0/ - . THE TENURE WAS 5 YEARS FROM THE DATE OF ALLOTMENT. ONE SUCH OFCPN IS CONVERTIBLE INTO 2500 EQUITY SHARES OF RS.10 EACH AT PAR AT THE OPTION OF THE INVESTOR TO BE EXERCISED AT THE END OF 5 TH YEAR FROM THE DATE OF ALLOTMENT AND IF SUCH OPTION IS NOT EXE RCISED BY THE ASSESSEE THEN ASSESSEE WILL GET THE AMOUNT OF RS.33750/ - BEING THE FACE VALUE OF EACH OFCPN AFTER FIVE YEARS. THESE FACTS ARE VERY IMPORTANT THAT IN THE INITIAL FOUR YEARS, THE ASSESSEE IS NOT ELIGIBLE TO DECIDE AS TO WHETHER HE IS GOING TO E XERCISE THE OPTION OF CONVERTIBILITY OR NOT AND SUCH OPTION IS TO BE EXERCISED ONLY IN THE LAST QUARTER OF THE 5TH YEAR AND THE ASSESSEE WILL GET SHARES AT THE END OF THE PERIOD OF FIVE YEARS AND NO INTEREST AS SUCH IS PAYABLE TILL MATURITY EVEN IF THE ASS ESSEE DOES NOT OPT FOR CONVERSION. THIS IS IMPORTANT FACT THAT IF THE ASSESSEE DOES NOT OPT FOR CONVERSION INTO EQUITY SHARES, THE ASSESSEE WILL GET RS.33750/ - FOR EACH OFCPN AFTER THE EXPIRY OF PERIOD OF FIVE YEARS FROM THE DATE OF ALLOTMENT. THIS IS ALSO A FACT THAT THESE DEBENTURES ARE TRANSFERABLE DURING THIS PERIOD OF FIVE YEARS AND THE COMPANY IS ALSO ELIGIBLE TO PURCHASE DEBENTURES AT DISCOUNT, AT PAR OR AT PREMIUM IN THE OPEN MARKET OR OTHERWISE. HENCE, IN THIS EARLIER PERIOD ALSO, EVEN IF ASSESSEE IS NOT OPTING FOR CONVERSION IN EQUITY SHARES, THE ASSESSEE CAN SELL THE DEBENTURES IN THE OPEN MARKET OR TO THE ISSUER COMPANY AND IT IS QUITE NATURAL THAT IN THE OPEN MARKET, SUCH DEBENTURES WILL COMMAND SUCH PRICE WHICH WILL INCLUDE OFFER PRICE + PROPOR TIONATE ACCRETION ON ACCOUNT OF DIFFERENCE IN THE ISSUE PRICE AND FACE VALUE I.T.A. NO S . 2 417 & 2418 /AHD/201 5 ASSESSMENT Y EARS: 20 04 - 05 & 2005 - 06 PAGE 3 OF 5 WHICH CAN BE CONSIDERED AS INTEREST ALTHOUGH NO SUCH NOMENCLATURE IS GIVEN FOR THIS ACCRETION IN THE ISSUE DETAILS. 2.8.5 IN THE LIGHT OF ABOVE FACTS, NOW WE HAVE TO DETERMIN E AS TO WHETHER IT CAN BE SAID IN THE FACTS OF THE PRESENT CASE THAT ANY INCOME HAS ACCRUED TO THE ASSESSEE IN THE PRESENT YEAR, ON ACCOUNT OF ACCRETION IN THE VALUE OF OFCPNS OF NIRMA INDUSTRIES LTD. THE ARGUMENT OF LD. D.R. IS THIS THAT THE ASSESSEE IS A N INVESTMENT COMPANY AND NOT BUSINESS COMPANY AND, THEREFORE, THESE OFCPNS ARE IN THE CHARACTER OF FDS. WE FIND NO FORCE IN THIS CONTENTION OF THE LD. D.R. BECAUSE IN THE CASE OF FDS, THERE IS NO OPTION AVAILABLE TO THE ASSESSEE FOR CONVERSION IN EQUITY SH ARES OR IN ANY OTHER ASST. SIMILARLY, SUCH FD IS NOT TRANSFERABLE IN THE SAME MANNER AS OFCPN IN THE PRESENT CASE IS TRANSFERABLE. IN THE PRESENT CASE, IF THE ASSESSEE EXERCISES THE OPTION FOR CONVERSION INTO EQUITY SHARES AT THE END OF THE PERIOD OF 5 YE ARS, NO INCOME IS GOING TO BE RECEIVED BY THE ASSESSEE AND THE ASSESSEE WILL ONLY GET 2500 EQUITY SHARES OF RS.10 EACH AT PAR. UNDER THESE FACTS, HOW IT CAN BE ACCEPTED THAT THESE OFCPNS ARE IN THE CHARACTER OF FD. 2.8.6 THE 2 ND ARGUMENT OF THE LD. D. R. WAS THIS THAT THE ASSESSEE COULD NOT DEMONSTRATE THAT THE CIRCULAR NO.2 OF CBDT DATED 15.02.2002 IS ILLEGAL. WE ARE AFRAID THAT HIS ARGUMENT OF THE LD. D.R. IS ALSO NOT RENDERING ANY HELP TO THE REVENUE BECAUSE WE ARE NOT REQUIRED TO DECIDE THE LEGALITY OF THIS BOARD S CIRCULAR IN THE PRESENT CASE BECAUSE IN THE PRESENT CASE, THE ONLY ARGUMENT OF THE LD. A.R. IS THIS THAT IN THE FACTS OF THE PRESENT CASE, NO INCOME IS ACCRUING TO THE ASSESSEE BECAUSE OF THIS REASON THAT IN CASE, THE ASSESSEE DECIDES IN F UTURE AT APPROPRIATE TIME I.E. IN THE LAST QUARTER OF THE 5TH YEAR THAT THE ASSESSEE WANTS TO EXERCISE THIS OPTION FOR CONVERSION OF OFCPN IN THE EQUITY SHARES, THE ASSESSEE IS NOT RECEIVING ANY INCOME ON ACCOUNT OF THESE OFCPNS AND IN THAT SITUATION WHEN THE ASSESSEE ULTIMATELY AFTER 5 YEARS DECIDES TO CONVERT THE OFCPNS IN EQUITY SHARES, WHAT THE ASSESSEE IS GOING TO GET IS ONLY PRESCRIBED NUMBER OF SHARES OF THE COMPANY NIRMA INDUSTRIES LTD. AND NOT ANY AMOUNT AGAINST THESE OFCPNS. HENCE, WHETHER THE CBD T CIRCULAR NO.2 DATED 15.02.2002 IS ILLEGAL OR LEGAL, IS NOT REQUIRED TO BE DECIDED BY US IN THE FACTS OF THE PRESENT CASE BECAUSE OUR DECISION REGARDING ACCRUAL OF INCOME IN THESE FACTS IS NOT DEPENDENT ON THE LEGAL VALIDITY OF THIS BOARD S CIRCULAR. 2. 8.7 NOW, WE HAVE TO DECIDE AS TO WHETHER ANY INCOME IS ACCRUING TO THE ASSESSEE IN RESPECT OF THESE OFCPNS ISSUED BY NIRMA INDUSTRIES LTD. WE HAVE ALREADY DISCUSSED THAT AS PER THE ISSUE DETAILS OF THESE OFCPNS, THE ISSUE PRICE IS RS.25000 EACH, THE FAC E VALUE IS RS.33750/ - , THE PERIOD IS 5 YEARS FROM THE DATE OF ALLOTMENT I.E. 25.03.2002 AND THE ASSESSEE HAS PUT OPTION WHICH CAN BE EXERCISED BY THE ASSESSEE IN THE LAST QUARTER OF THE 5 TH YEAR AND THEN ASSESSEE HAS ALSO THE OPTION TO CONVERT SUCH OFCPNS AT THE END OF 5 TH YEAR FROM T HE DATE OF ALLOTMENT INTO 2500 EQUITY SHARES OF RS.10 EACH AT PAR. THESE ISSUE DETAILS OF OFCPN SUGGEST THAT NO INCOME IS GUARANTEED TO THE ASSESSEE EVEN AFTER 5 YEARS PERIOD FORM THE DATE OF ALLOTMENT IF THE ASSESSEE OPTS FOR CONVERSION AND THE ASSESSEE WILL GET THE INCOME BEING DIFFERENCE BETWEEN THE FACE VALUE AND THE ISSUE PRICE ONLY IF SUCH OPTION OF CONVERSION IS NOT EXERCISED BY THE ASSESSEE WHICH HE CAN EXERCISE ONLY IN THE LAST QUARTER OF THE 5TH YEAR. THERE WAS AN I.T.A. NO S . 2 417 & 2418 /AHD/201 5 ASSESSMENT Y EARS: 20 04 - 05 & 2005 - 06 PAGE 4 OF 5 ARGU MENT FORWARDED BY THE LD. D.R. THAT BEFORE THE LAST QUARTER OF THE 5TH YEAR, THE ASSESSEE HAS AN OPTION TO SELL THESE OFCPNS BECAUSE THESE OFCPNS ARE TRANSFERABLE AND IN THAT SITUATION, THE ASSESSEE WILL GET AT LEAST ISSUE PRICE + PROPORTIONATE ACCRETION T ILL THE DATE OF TRANSFER OVER AND ABOVE THE ISSUE PRICE. THIS MAY BE CORRECT BUT IN OUR CONSIDERED OPINION, EVEN IN THE LIGHT OF THESE FACTS, IT CANNOT BE SAID THAT ANY INCOME IS ACCRUING TO THE ASSESSEE ON DAY TO DAY OR YEAR TO YEAR BASIS. THE OFCPN MAY B E HELD BY THE ASSESSEE AS INVESTMENT OR TRADING ITEM. IF THE ASSESSEE IS HOLDING OFCPN AS A TRADING ITEM AND TILL THE SAME IS SOLD BY THE ASSESSEE, IT HAS TO BE CONSIDERED BY THE ASSESSEE AS CLOSING STOCK WHICH HAS TO BE VALUED AT THE COST OR AT THE COST O R MARKET PRICE WHICHEVER IS LOWER AND IN THAT SITUATION, EVEN IF THE MARKET PRICE IS MORE THAN COST PRICE I.E. ISSUE PRICE, THEN ALSO THIS INCOME IS NOT TO BE TAXED TILL THE SALE TAKES PLACE. ALTHOUGH, IF THE MARKET PRICE GOES DOWN BELOW THE COST PRICE I.E . ISSUE PRICE THEN IN THAT SITUATION, THE ASSESSEE CAN CLAIM LOSS TO THAT EXTENT BY VALUING THE CLOSING STOCK OF OFCPN AT MARKET PRICE BUT IN CASE THE MARKET PRICE IS MORE THAN THE COST PRICE, NO INCOME IS ACCRUING TO THE ASSESSEE TILL THE SAME IS SOLD. 2.8.8 IN ANOTHER SITUATION, WHERE THE ASSESSEE IS HOLDING THESE OFCPNS AS INVESTMENT THEN ALSO, THE INCOME IF ANY IN RESPECT OF SUCH CAPITAL ASSET IS TAXABLE ONLY AS CAPITAL GAIN AND THAT TOO AFTER THE CAPITAL ASSET IN QUESTION IS TRANSFERRED BY THE ASS ESSEE. TILL THE ACTUAL TRANSFER TAKES PLACE, NEITHER ANY INCOME IS TAXABLE IN THE HANDS OF THE ASSESSEE EVEN IF THE MARKET VALUE OF THE ASSET HAS GONE UP NOR ANY LOSS IS ALLOWABLE TO THE ASSESSEE EVEN IF MARKET VALUE OF THE ASSET HAS GONE DOWN. IT IS NOT T HE CASE OF THE A.O. THAT THE ASSESSEE HAS SOLD OR TRANSFERRED THESE OFCPNS IN THE PRESENT YEAR. IN THE ABSENCE OF THIS, IT CANNOT BE SAID THAT ANY INCOME HAS ACCRUED TO THE ASSESSEE EVEN IF IT IS ACCEPTED THAT THE MARKET VALUE OF THESE OFCPNS TILL THE LAST DATE OF THE PRESENT YEAR IS MORE THAN COST PRICE I.E. ISSUE PRICE WHICH CAN BE ISSUE PRICE + PROPORTIONATE ACCRETION AND THE DIFFERENCE BETWEEN THE FACE VALUE AND ISSUE PRICE. WE HAVE ALREADY DISCUSSED THAT THE NATURE OF OFCPN IS NOT THAT OF FD AND IT IS ALSO NOT OF THE NATURE OF DDB BECAUSE OF CONVERTIBILITY OPTION AND UNCERTAINTY ABOUT RECEIPT OF ANY EXTRA AMOUNT OVER AND ABOVE THE ISSUE PRICE. EVEN ON CONVERSION, SHARES ARE TO BE ALLOTTED AT PAR AND NOT AT A PREMIUM I.E. FACE VALUE. CONSIDERING ALL THES E FACTS, WE HOLD THAT IN THE FACTS OF THE PRESENT CASE, IT CANNOT BE SAID THAT ANY INCOME HAS ACCRUED TO THE ASSESSEE ON ACCOUNT OF THESE OFCPNS OF NIRMA INDUSTRIES LTD. BECAUSE NO SALE HAS TAKEN PLACE AND THERE IS NO GUARANTEED INCOME TO THE ASSESSEE EVEN AFTER FIVE YEARS IN CASE THE ASSESSEE OPTS FOR CONVERSION INTO SHARES AT PAR. HENCE, THIS GROUND OF THE ASSESSEE IS ALLOWED. 2.8.9 IN THE RESULT, APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. 4. RESPECTFULLY FOLLOWING THE VIEWS OF THE DIVISION BENCH, AS ABOVE, I ALLOW THE GROUNDS RAISED BY THE ASSESSEE IN BOTH THE ASSE SSMENT YEARS . I.T.A. NO S . 2 417 & 2418 /AHD/201 5 ASSESSMENT Y EARS: 20 04 - 05 & 2005 - 06 PAGE 5 OF 5 5 . IN THE RESULT, BOTH THE APPEAL S ARE ALLOWED . PR O NOUNCED IN THE OPEN COURT TODAY ON THE 21 ST DAY OF AUGUST 2017. SD/ - PRAMOD KUMAR (ACCOU NTANT MEMBER) DATED: AHMEDABAD, THE 21 ST DAY OF AUGUST , 2017. COPIES TO : (1) THE APPELLANT (2) THE RESPONDENT (3) CIT (4) CIT(A) (5) DR (6) GUARD FILE BY ORDER ASSISTANT REGISTRAR INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCHES, AHMEDABAD