DCIT, CHENNAI V. TVS Investments Ltd., CHENNAI

ITA 277/CHNY/2017

• Counselvise Citation: [2022] 106 COUNSELVISE.COM (IT) 6239 (ITAT-CHENNAI)
• Duration Of Justice: 5 year(s) 6 month(s) 16 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-08-2022
• Appeal Filed By: Department
• Order Result: PartlyAllowed
• Bench Allotted: B
• Assessment Year: 2009-2010
• Appeal Filed On: 30-01-2017
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Keywords: Earning of tax free income; Rule 8D; Capital Gains
• Section: 6; 143(3); 14A; 208

Judgement Text

आयकर अपीलीय अिधकरण ‘बी’ ायपीठ चे ई म । IN THE INCOME TAX APPELLATE TRIBUNAL ‘B’ BENCH, CHENNAI माननीय +ी महावीर िसंह, उपा12 एवं माननीय +ी मनोज कु मार अ7वाल ,लेखा सद: के सम2। BEFORE HON’BLE SHRI MAHAVIR SINGH, VICE PRESIDENT AND HON’BLE SHRI MANOJ KUMAR AGGARWAL, AM आयकर अपील सं./ ITA No.277/Chny/2017 (िनधाCरण वषC / Assessment Year: 2009-10) DCIT Corporate Circle-3(1), Chennai. बनाम/ V s. M/s. TVS Investments Ltd. (now known as TVS Capital Funds Ltd) Jayalakshmi Estates, No.29 (Old No.8), Haddows Road, Chennai – 600 006. थायी लेखा सं./जीआइ आर सं./P AN /GI R No . AAAC T -1 1 5 4 - H (अपीलाथ /Appellant) : ( थ / Respondent) अपीलाथ की ओरसे/ Assessee by : Shri R. Vijayaraghavan (Advocate)-Ld. AR थ की ओरसे/Revenue by : Shri Guru Bashyam (CIT)-Ld. DR सुनवाई की तारीख/Date of Hearing : 16-06-2022 घोषणा की तारीख /Date of Pronouncement : 17-08-2022 आदेश / O R D E R Manoj Kumar Aggarwal (Accountant Member) 1. Aforesaid appeal by Revenue for Assessment Year (AY) 2009-10 arises out of the order of learned Commissioner of Income Tax (Appeals)-11, Chennai [CIT(A)] dated 14-10-2016 in the matter of assessment framed by Ld. Assessing Officer [AO] u/s. 143(3) of the Act on 31-12-2011. The grounds raised by the Revenue read as under: 1. The order of the learned CIT(A) is contrary to law and facts and circumstances of the case. 2.1 The ld. CIT(A) erred in directing the AO to re-compute the disallowance under Rule 8D after excluding the appellant's investment in subsidiary/associated ITA No.277/Chny/2017 - 2 - companies which are strategic in nature though the assessee company has declared income on dividend of Rs.1,05,53,559/- from its sister concern/associated companies and claimed the same as exempted income. 2.2 The learned CIT(A) failed to appreciate that Rule 8D(2) does not differentiate between strategic investments and investments in subsidiary/associate companies with other investments and the word used in the rule is only "value of Investment" and hence the investment in subsidiary company shall be included for calculation of disallowance under Rule 8D(2). 2.3 The learned CIT(A) erred in directing the AO to consider the assessee's own funds i.e. capital reserves available on the date of investment which yields exempted income without giving any clear finding that the assessee has invested its own fund. 2.4 The learned CIT(A) ought to have seen that the assessee company has never given clear break up of investments along with the statistics from own funds and from borrowed funds during the assessment proceedings. 2.5 The learned CIT(A) ought to have taken into consideration that the decision relied on in the case of M/s. TVS Motors Company Limited in AY 2010-11 has not been accepted by the Department and appeal filed before Hon'ble Madras High Court is pending as on date. 3.1 The learned CIT(A) erred in allowing the assessee's claim of sale of shares belongs to its sister concern, M/s. TVS Finance and Services Limited at price of Rs.12.86 per share is acceptable whereas the same shares were sold by one, Smt. Mallika Srinivasan, wife of one director of the assessee company for a consideration of Rs.25/-. 3.2 The learned CIT(A) ought to have seen that these transactions are only colorable device for evading tax on long term capital gain arising in the future years and hence cannot be allowed. 3.3 The learned CIT(A) erred in accepting the assessee company plea that share value will be fixed for retail investors are more than the corporate investors and the decision of the Hon'ble Tribunal on similar issue was not accepted by the Department and appeal filed before the Hon'ble High Court is pending in the case of M/s. TVS Motors Limited for the AY 2010-11. 3.3 It is humbly submitted that the learned CIT(A) ought to have followed the ratio held by the Hon'ble Supreme Court in the case of M/s. Ashini Lease and Finance Vs. CIT(2008) reported in 217 CTR 17(SC), the Hon'ble Delhi High Court in the case of CIT Vs. Vachanband Investment Limited, reported in (2012) 208 Taxmann.com 211 (Delhi) and the decision of the Hon'ble Madras High Court in the case of M/s. Premier Synthetic Industries Private Limited Vs.ITO(2012) 208 Taxmann 195. 4.1 The learned CIT(A) erred in allowing the Long-Term Capital Loss on buy back of shares of M/s. Haritha Tech Serv. Limited without taking account the entire facts of the case and financials of M/s. Haritha Tech Serv. Limited. 4.2 The learned CIT(A) ought to have seen that the entire transactions are only colorable device to adjust the expected Long Term Capital Gains. As is evident, three issues arise for our consideration- (i) disallowance u/s 14A; (ii) Computation of Profit on sale of shares; (iii) Long-Term Capital Loss on buy back of shares. ITA No.277/Chny/2017 - 3 - 2. The registry has noted a delay of 8 days in the appeal, the condonation of which has been sought by the revenue. Considering the period of delay, the delay is condoned and the appeal is admitted for adjudication on merits. 3. The Ld. CIT-DR advanced arguments and supported the assessment framed by Ld. AO whereas Ld. AR controverted the same and relied on the adjudication of Ld. CIT(A) in the impugned order. Having heard rival submissions and after going through the orders of lower authorities, our adjudication to the issues would be as under. The assessee being resident corporate assessee is stated to be engaged in property development. 4. Disallowance u/s 14A 4.1 Considering the investment portfolio of the assessee, Ld. AO invoking Rule 8D, computed disallowance u/s 14A for Rs.1033.90 Lacs. The assessee earned exempt income of Rs.105.53 Lacs from one of its subsidiary-company and offered disallowance of Rs.1.17 Lacs during assessment proceedings. The assessee submitted that the investment was made in the year 2002 and no expenditure was incurred to earn the exempt income. 4.2 The Ld. CIT(A), considering the decision of Tribunal for AY 2011-12, directed Ld. AO to exclude strategic investments. The Ld. AO was further directed to consider the availability of surplus funds and thereafter, apply Rule 8D. Aggrieved as aforesaid, the revenue is in further appeal before us. 4.3 We find that, in terms of decision of Hon’ble Apex Court in the case of Maxopp Investment Ltd. V/s CIT (91 Taxmann.com 154), exclusion of strategic investment is not correct. Therefore, the ITA No.277/Chny/2017 - 4 - impugned order stand modified to that extent. The other directions as given by Ld. CIT(A) do not require any interference on our part. This ground stand partly allowed. 5. Long Term Capital Loss on Sale of Shares 5.1 The assessee sold shares of M/s TVS Finance and Services Ltd. (TFSL) @Rs.10/- per share. However, Ms. Mallika Srinivasan, the spouse of CMD of a group company, had sold the shares @Rs.25/- per share. Considering the same, Ld. AO adopted sale price of Rs.25/- per share and computed Long-Term Capital Gains (LTCG) of Rs.143.19 Lacs. 5.2 Similarly, the assessee sold shares of M/s Harita Tech Serv Ltd. (HTSL) (formerly known as TVS e-technologies Ltd. and Harita TVS Technologies Ltd.). The financial statements of that entity were perused for AY 2006-07 to 2009-10 which revealed that the assessee made investment in this entity during AYs 2006-07 and 2008-09 despite the fact that this entity was incurring losses. Therefore, current sale of shares by the assessee was held to be colorable device to offset the capital gain booked by the assessee during the year. Finally, the losses thus claimed by the assessee was disallowed. 5.3 During appellate proceedings, the assessee submitted that TFSL was NBFC regulated by RBI. The assessee and TVS Motor Co. Ltd. (TMCL) were key promoters of that entity and held 89.77% of shareholding. Since TFSL had accumulated losses and it was falling short of capital adequacy norms, the assessee sold the shares which resulted into Long-Term Capital Losses. Comparing the same with the sale of shares by Ms. Mallika Srinivasan was not correct since she was public category shareholder holding a few hundred shares which ITA No.277/Chny/2017 - 5 - was offered by her in the exit route provided in the public under the book building process associated with delisting of shares as per SEBI guidelines. Therefore, the average sale price of Rs.12.50 as received by the assessee could not be compares since one was through delisting process and another was arrangement of the promoters to recognize the ‘Nil’ value of shares held by them as promoters. The findings of Ld. AO that it was a colorable device, was assailed on the strength of various case laws as enumerated in the impugned order. The assessee also relied on first appellate order for AY 2010-11 favoring TMCL (another promoter) on the same very issue. This decision was confirmed by Tribunal vide ITA Nos.329/Mds/2016 order dated 11.08.2016. It was held by the bench that exit price offer under reverse book building process regulated by RBI to provide exit to the retail investors could not be benchmarked for subsequent sale price as it has no relevance to the book value of shares which is negative. Subsequent selling prices is determined based on the negative book value of shares and therefore, are realistic price for transfer of shares. The AO did not establish that there was understatement of sales consideration. 5.4 The aforesaid arguments find favor with Ld. CIT(A) who reversed the stand of Ld. AO, inter-alia, in terms of cited decision of the Tribunal. Aggrieved the revenue is in further appeal before us. 5.5 We find that this issue stood covered in assessee’s favor by the cited decision of Tribunal in case of other promoter and therefore, no interference is required in the impugned order, in this regard. We concur with the adjudication of Ld. CIT(A). The corresponding grounds raised by the revenue stand dismissed. ITA No.277/Chny/2017 - 6 - 5.6 So far as Long-Term Capital Loss on sale of shares of HTSL is concerned, it was noted by Ld. CIT(A) that HTSL underwent restructuring and hived-off its Mechanical Design Services business. Accordingly, they decided to reduce the capital base and offered to buy-back the shares as per extant rules @Rs.0.32 per share on the basis of independent valuation made by external valuer in accordance with the provisions of Companies Act and Buy Back Rules. Similar issue stood covered in assessee’s favor by first appellate order for AY 2010-11 in case of TMCL (other promoter) which was upheld by Tribunal in ITA No.329/Mds/2016 order dated 11.08.2016. The Ld. CIT(A) also relied on the decision of Hon’ble High Court of Bombay in the case of Capgemini India P. Ltd. (CP No.4343 dated 28.04.2015) wherein it was held that buy-back of shares as per the Companies Act could not be termed as colorable device to evade taxes. It was legally permissible procedure. Accordingly, the additions were deleted against which the revenue is in further appeal before us. 5.7 We find that the ratio of cited decision of Tribunal in ITA No.329/Mds/2016 dated 11.08.2016 is applicable to this issue also. The sale of shares through buy-back route as per extant rules could not be said to be a colorable device. The cited decision of Hon’ble High Court of Bombay in Capgemini India P. Ltd. (CP No.4343 dated 28.04.2015) clearly support this proposition. We also concur with other observations of Ld. CIT(A), in the impugned order. Accordingly, we find no reason to interfere in the impugned order, on this issue. The grounds thus raised stand dismissed. ITA No.277/Chny/2017 - 7 - Conclusion 6. The appeal stand partly allowed in terms of our above order. Order pronounced on 17 th August, 2022. Sd/- (MAHAVIR SINGH) उपा12 /VICE PRESIDENT Sd/- (MANOJ KUMAR AGGARWAL) लेखा सद: / ACCOUNTANT MEMBER चे,ई / Chennai; िदनांक / Dated : 17-08-2022 EDN/- आदेश की Xितिलिप अ 7ेिषत/Copy of the Order forwarded to : 1. अपीलाथ /Appellant 2. यथ /Respondent 3. आयकर आयु (अपील)/CIT(A) 4. आयकर आयु /CIT 5. िवभागीय ितिनिध/DR 6. गाड फाईल/GF