Appeal details
Counselvise Citation
[2023] 100 COUNSELVISE.COM (IT) 5424 (ITAT-KOLKATA)
Assessee PAN
Bench
Appeal Number
Duration Of Justice
4 year(s) 8 month(s) 4 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
08-11-2023
Appeal Filed By
Department
Order Result
PartlyAllowed
Bench Allotted
B
Next Hearing Date
04-09-2023
Assessment Year
2009-2010
Appeal Filed On
04-03-2019
Judgement Text
| आयकर अपीलीय अिधकरण ᭠यायपीठ, कोलकाता | IN THE INCOME TAX APPELLATE TRIBUNAL “B” BENCH, KOLKATA BEFORE SHRI SANJAY GARG, HON’BLE JUDICIAL MEMBER & DR. MANISH BORAD, HON’BLE ACCOUNTANT MEMBER I.T.A. No. 427/Kol/2019 Assessment Year: 2009-10 Asst. Commissioner of Income tax, Circle-6(2), Kolkata Vs M/s. Nagreeka Synthetics Pvt. Ltd. 6 th Floor, Jain Chamber 18, R.N. Mukherjee Road Kolkata - 700001 [PAN : AAACN8691D] अपीलाथᱮ/ (Appellant) ᮧ᭜ यथᱮ/ (Respondent) C.O. No. 19/Kol/2021 Assessment Year: 2009-10 M/s. Nagreeka Synthetics Pvt. Ltd. 6 th Floor, Jain Chamber 18, R.N. Mukherjee Road Kolkata - 700001 [PAN : AAACN8691D] Vs Asst. Commissioner of Income tax, Circle-6(2), Kolkata अपीलाथᱮ/ (Appellant) ᮧ᭜ यथᱮ/ (Respondent) Assessee by : Shri S.D. Verma, Advocate Revenue by : Shri Abhijit Kundu, CIT D/R सुनवाई कᳱ तारीख/Date of Hearing : 05/09/2023 घोषणा कᳱ तारीख /Date of Pronouncement: 09/11/2023 आदेश/O R D E R PER DR. MANISH BORAD, ACCOUNTANT MEMBER : The present appeal is directed at the instance of the revenue against the order of the learned Commissioner of Income tax (Appeals)- 4, Kolkata (hereinafter the “ld. CIT(A)”) dt. 21/06/2018, passed u/s 250 of the Income Tax Act, 1961 (“the Act”) for the Assessment Year 2009- 10. The assessee has filed a cross-objection being C.O. No. 19/Kol/2021. 2. The Registry has pointed out that there is a delay of 965 days in filing the cross-objection by the assessee. The assessee has filed a 2 I.T.A. No. 427/Kol/2019 Assessment Year: 2009-10 C.O. No. 19/Kol/2021 Assessment Year: 2009-10 M/s. Nagreeka Synthetics Pvt. Ltd. petition for condonation of delay dt. 21/12/2021 stating therein that the person who handled the income tax matters of the assessee group, Shri K.N. Bansal, died on 24/05/2021. Later, the assessee came to know that the addition of Rs.8,02,00,000/- for the impugned Assessment Year 2009-10 has been confirmed by the ld. CIT(A)-4, Kolkata and thereafter filed this cross-objection. In view of the reasons cited by the assessee in its condonation petition, we are convinced that the assessee was prevented by sufficient cause from filing this cross- objection in time. Accordingly, we condone the delay and proceed to admit the same for hearing. 3. First, we will take up the revenue’s appeal. The facts in brief are that the assessee is a private limited company engaged in the business of trading, manufacturing and investment. Loss of Rs.39,45,49,119/- declared in the e-return for Assessment Year 2009-10 furnished on 23/09/2009. Return processed u/s 143(1) of the Act on 22/11/2010. Thereafter, the case selected for scrutiny and assessment u/s. 143(3) of the Act was completed, assessing the total loss at Rs.38,69,14,651/-. Thereafter, notice u/s 148 of the Act dt. 27/03/2014 issued and duly served upon the assessee based on certain observations regarding applicability of provision of Section 2(22)(e) of the Act and applicability of provisions of Explanation to Section 73 of the Act. After considering various details filed by the assessee, the ld. AO made various additions assessing income at Rs.8,30,35,930/-. Aggrieved assessee preferred appeal before the ld. CIT(A) and partly succeeded. 3 I.T.A. No. 427/Kol/2019 Assessment Year: 2009-10 C.O. No. 19/Kol/2021 Assessment Year: 2009-10 M/s. Nagreeka Synthetics Pvt. Ltd. 4. Now, the revenue is in appeal before this Tribunal raising the following grounds:- “1. Whether on the facts and in the circumstances of the case, the Ld. CIT(A) has erred in law in not appreciating the fact that the loss in purchase and sale of shares of other companies including trading in derivatives/derivative trading loss is speculation business loss in view of the explanation to the section 73 of the Income Tax Act, 1961 and said loss can only be allowed to be set off against the income of speculation profit only. 2. That the appellant craves for leave to add, delete and modify the grounds of appeal before or at the time of hearing.” 5. The ld. D/R supported the order of the ld. Assessing Officer and ld. Counsel for the assessee supported the findings of the ld. CIT(A). 6. We have heard rival contentions and perused the material placed before us. We observe that the assessee has incurred loss in derivative transactions claiming it as a business loss. But the ld. Assessing Officer observed that the trading in derivative transactions is a speculative business and such a speculation loss can be allowed to be set off only against speculative profit. However, the ld. CIT(A) granted relief to the assessee observing as follows:- “In the reassessment order the AO has treated the entire loss suffered from Derivative transaction as speculative in nature by invoking explanation to Sec, 73 of the Act. I have gone through the submission of the appellant and order passed by the AO. All the transactions in which the appellant has incurred loss is in relation to derivative transactions. Derivative transactions are totally different from normal share trading. Shares are the underlying assets of any derivative transaction. Explanation to Sec. 73 uses the expression "shares of any other company". These are operative word of the provision. In absence of transaction of purchase or sale of shares the said explanation cannot be triggered. The Securities Contract Regulation Act also distinguishes shares and derivative as two different products. Therefore, there seems to be basic fallacy in the understanding of the AO and consequent invocation of Explanation to sec 73 of the Act. Reference to Sec 43(5)(d) is also worth noting in this regard which deals with derivative transaction. The view I am taking above is also 4 I.T.A. No. 427/Kol/2019 Assessment Year: 2009-10 C.O. No. 19/Kol/2021 Assessment Year: 2009-10 M/s. Nagreeka Synthetics Pvt. Ltd. supported by the decision of Delhi HC_in the case of CIT -vs.- DLF Commercial Developers Ltd [ITA No. 94 of 2013] and also decision of Jurisdictional HC in the case of Asian Financial Services Ltd. -vs.- CIT (2016) [ITA No. 139 of 2015]. Hence, this ground filed by the appellant is allowed and entire loss is to be allowed.” 7. We observe that the ld. Assessing Officer while treating the loss from derivative as speculation loss has invoked the explanation to Section 73 of the Act. Section 73 of the Act deals with loss in speculation business and explanation to Section 73 refers to certain conditions under which business of purchase and sale of shares has to be treated as speculation business. The said explanation reads as under:- “[Explanation.—Where any part of the business of a company ([other than a company whose gross total income consists mainly of income which is chargeable under the heads "Interest on securities", "Income from house property", "Capital gains" and "Income from other sources"], or a company 3 [the principal business of which is the business of trading in shares or banking] or the granting of loans and advances) consists in the purchase and sale of shares of other companies, such company shall, for the purposes of this section, be deemed to be carrying on a speculation business to the extent to which the business consists of the purchase and sale of such shares.]” 7.1. Now, from perusal of the above explanation, we notice that if the assessee carries on a business other than a company whose gross total income consists mainly of income which is chargeable under the interest or securities, income from house property, capital gains and income from other sources and w.e.f. 01/04/2015, even the companies whose principle business is that of trading in shares and that of banking or of granting of loans and advance then in case of such companies other than those referred above, it along with its main 5 I.T.A. No. 427/Kol/2019 Assessment Year: 2009-10 C.O. No. 19/Kol/2021 Assessment Year: 2009-10 M/s. Nagreeka Synthetics Pvt. Ltd. business also carries on the business of purchase and sales then such business of purchase and sale of shares is to be deemed as speculation business. The ld. Assessing Officer has also observed that the alleged loss from trading of derivatives is linked to equity shares and drawing such inference and also on examining the facts of the case the assessee company’s main business is of manufacturing of cotton yarn and derivatives and the ld. Assessing Officer has invoked explanation to Section 73 and held the alleged loss as speculation loss. 7.1.1. So far as the provisions of Section 43(5) of the Act, which the ld. CIT(A) has referred to, that just defines the speculative transactions and for the sake of reference, Section 43(5) of the Act reads as follows:- “(5)"speculative transaction" means a transaction in which a contract for the purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrips Provided that for the purposes of this clause— (a) a contract in respect of raw materials or merchandise entered into by a person in the course of his manufacturing or merchanting business to guard against loss through future price fluctuations in respect of his contracts for actual delivery of goods manufactured by him or merchandise sold by him; or (b) a contract in respect of stocks and shares entered into by a dealer or investor therein to guard against loss in his holdings of stocks and shares through price fluctuations; or (c) a contract entered into by a member of a forward market or a stock exchange in the course of any transaction in the nature of jobbing or arbitrage to guard against loss which may arise in the ordinary course of his 96 business as such member; 97 [or] 97 [(d) an eligible transaction in respect of trading in derivatives 98 referred to in clause 99 [(ac)] of section 2 1 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) carried out in a recognised stock exchange; 2 [or]] 2 [(e) an eligible transaction in respect of trading in commodity derivatives 98 carried out in a 3 [recognised stock exchange] 4 [, which is chargeable to commodities transaction tax under Chapter VII of the Finance Act, 2013 (17 of 2013),]] shall not be deemed to be a speculative transaction:” 6 I.T.A. No. 427/Kol/2019 Assessment Year: 2009-10 C.O. No. 19/Kol/2021 Assessment Year: 2009-10 M/s. Nagreeka Synthetics Pvt. Ltd. 7.2. Now, from perusal of the above Section 43(5)(d) of the Act, it only defines the speculative transactions and states that eligible transactions in respect of trading in derivatives carried out in recognised stock exchange will not be considered as a speculative transactions. So, Section 43(5) of the Act just provides definition but explanation to Section 73 of the Act is a specific provision relevant to a certain category of companies as discussed above in explanation to Section 73. We find that the ld. CIT(A) has not examined the financial statement of the assessee company before coming to the conclusion that derivative transactions are totally different from normal share trading. He stuck to the words purchase and sale of shares in explanation to Section 73 but has not gone a step ahead to look into the intent of legislation of inserting such explanation. The ld. CIT(A) ought to have examined two things, firstly what actually were the derivative transactions and whether underlying assets were equity shares and why the trading in derivatives should be treated separately from that of purchase and sale of shares when the transactions are purely based on the listed equity shares. Secondly, the ld. CIT(A) ought to have gone through the audited financial statements in order to examine what the total turnover of the assessee company and whether the main objective is that of some manufacturing and trading goods and whether the assessee company falls under any of those companies referred to Explanation u/s 73 of the Act. Finding of the ld. CIT(A) is too general and seems to have taken shelter of Section 43(5)(d) of the Act to adjudicate the issue, even when the ld. Assessing 7 I.T.A. No. 427/Kol/2019 Assessment Year: 2009-10 C.O. No. 19/Kol/2021 Assessment Year: 2009-10 M/s. Nagreeka Synthetics Pvt. Ltd. Officer has specifically mentioned explanation to Section 73 of the Act and has not disputed about the derivative transactions falling under Section 43(5)(d) of the Act but only harped upon the fact that since explanation to Section 73 of the Act is applicable, Section 43(5)(d) of the Act will not be applicable. 7.3. Under these given facts and circumstances of the case we are of the considered view that the issue needs to be restored to the ld. CIT(A) for fresh adjudication in terms of the directions given hereinabove and in case necessary documents are not available on record, the same shall be filed by the assessee and if needed a remand report may be called for from the Assessing Officer, so as to reach to a finding as to whether explanation to Section 73 of the Act is applicable on the alleged loss from trading of derivatives. Needless to mention that the assessee be granted sufficient opportunity of being heard. The assessee shall produce relevant documents/evidence, if any, in support of its case. Thus, Ground No. 1 of the revenue is allowed for statistical purposes. 8. Ground No. 2 is general in nature. 9. Accordingly, appeal of the revenue is allowed for statistical purposes. 10. Now, we take up the cross-objection filed by the assessee wherein the following grounds have been raised:- “1. The ld. Commissioner of Income Tax (Appeal) Kol-4 was not justified in confirming addition of Rs.8,02,00,000/- (Eight Crore Two Lacs) u/s 2(22)(e) of I.T. Act, 1961 on account of 0% OFCD, issued to Nagreeka Foils Ltd. (71600000/-) and Indian Overseas Exports Ltd. (Rs.86000000/-). 8 I.T.A. No. 427/Kol/2019 Assessment Year: 2009-10 C.O. No. 19/Kol/2021 Assessment Year: 2009-10 M/s. Nagreeka Synthetics Pvt. Ltd. 2. The Ld. Commissioner of Income Tax (Appeal)-4 has erred in facts and in law, in not considering judicially that amount received towards contribution of shares, debenture will not attract provisions of Sec2(22)(e) of the I.T. Act, 1961. 3. The Respondent craves leave to add, alter or modify any grounds of appeal.” 11. Ground Nos. 1 & 2 relate to addition u/s 2(22)(e) of the Act at Rs.8,02,00,000/-. The ld. Counsel for the assessee vehemently argued referring to the written submissions and stated that the assessee company has issued 0% Optionally Fully Convertible Debentures (for short 'OFCDs'), which are securities and not loan or advance, therefore, Section 2(22)(e) of the Act will not have any applicability to the said transactions. So far as the assessee company having substantial interest in the concerns, namely, Nagreeka Foils Ltd., (20.34%) and Indian Overseas Exports Limited (16.24%), the same has not been disputed. The assesse business comprises dealing in yarn, cloth & others Fibrous product Trading Import & Export. During previous year relevant to Asst year 2009-10, the assesse company issued 0% optionally Fully convertible debenture worth Rs. 8,02,00,000/-. Out of the above issue Debenture worth Rs. 71600000/- were issued to Nagreeka Foils Ltd, and Debenture worth Rs. 8600000/- were issued to Indian Overseas Exports Ltd. The assesse company is having substantial interest in Nagreeka Foils Ltd. ( Share holding 16.24%) and India Overseas Exports Ltd, having 20.34% shares ( Refer Page 12 of Paper Book reverse side) Due to substantial share holding in both the companies, the A.O. made an addition of Rs 9 I.T.A. No. 427/Kol/2019 Assessment Year: 2009-10 C.O. No. 19/Kol/2021 Assessment Year: 2009-10 M/s. Nagreeka Synthetics Pvt. Ltd. 80200000/- u/s. 2(22) (e)because both the companies have sufficient reserves. a)Nagreeka Foils Ltd Rs. 690452257/- ( Refer Page. 51) (and investment in Debenture appear at Page 13). lndia Overseas Exports Ltd- Rs. 300000000/- ( Page 46 of Paper Book ) and investment in optionally Fully convertible Debenture appears at Page 47 of Paper Book. 6. The Ld. A.O. under wrong interpretation of Sec 2(22) (e) added this amount as deemed dividend income in the hands of the assesse company, Ld. C.I.T.(A)-4, in his order adjudicating. Ground No.4. confirmed the addition without judicial interpretation of Sec 2(22)(e) ii) However while deciding appeal he has stated in para No. 4.3.21 at Page 10 (reverse side )- 'The Honb'le Delhi ITAT, in DCIT Vs Sahara India Commercial Corporation (ITA No5772/DEL/2010), has held that optionally Fully convertible debenture ( OFCD ) do not fall under Sec 2(22) (e) and can not be equated with receipts of loans or deposit. Now the basis for deciding this issue depends on interpretation of Sec. 2(22) (e). The basic issue is that whether issue of 0% optionally Fully convertible debenture can be considered as loan/advance; and if not addition is liable to be deleted. Case Laws for proper interpretation of Sec 2(22) (e) 1. Nandlal Kanodia Vs C.l.T. Central. Kolkata 122 ITR. P. 405 ( Cal) Two basic principals for interpretation of Sec 2(22) (e): i) That only a loan which would include the other payment mentioned in Sec 2(22)(e) can be deemed to be dividend. ii) That too only to the extent that the company has at the date of payments accumulated profits. 10 I.T.A. No. 427/Kol/2019 Assessment Year: 2009-10 C.O. No. 19/Kol/2021 Assessment Year: 2009-10 M/s. Nagreeka Synthetics Pvt. Ltd. i) C.l.T Vs Bhaskar Miltas 202 ITR. 612 ( Cal) ( same expression should be assigned) as per statute ii) Shankar Construction Co Vs C.l.T. 189 ITR 463 Kerala Case Laws Relied against addition of Rs. 80200000/- 1. ACIT 1(2) (1)- Vs Jasubhai Engineering P.Ltd ITA No 7519/Mum/2016 Asst Year 2013-14 ( Refer Para No. 12 & 17 of Judgement 2. DCIT Vs Saha India Commercial corporation ITA No 5772/DEL/2010 Asst Year 2005-06 ( Refer Page 4,5, Para No.12 at page 11, Para 17 Page.15, Page 18- Para.22) In view of the above judicial pronouncements addition made by A.O. u/s. 2(22)(e) is liable to be deleted. 11.1. The ld. D/R, on the other hand, vehemently argued referring to the order of the ld. CIT(A) and further stated that the decision of the Co-ordinate Bench of the ITAT Delhi in the case of DCIT vs. Sahara India Commercial Corpn. Ltd. in ITA No.5772/Del/2010, was relating to the issue of Section 269SS of the Act and is not applicable on the facts of the assessee. 12. We have heard rival contentions and perused the material placed before us. We notice that the assessee company is a beneficiary having substantial shareholding in Nagreeka Foils Ltd., (20.34%) and Indian Overseas Exports Limited (16.24%). During the year, the assessee company issued debentures of Rs. 7,16,00,000/- to Nagreeka Foils Ltd. and of Rs. 86,00,000/- to Indian Overseas Exports Limited. 11 I.T.A. No. 427/Kol/2019 Assessment Year: 2009-10 C.O. No. 19/Kol/2021 Assessment Year: 2009-10 M/s. Nagreeka Synthetics Pvt. Ltd. Such debentures were issued in the form of 0% OFCD and certain terms and conditions were attached thereto and the option was given to both the concerns Nagreeka Foils Ltd. and Indian Overseas Exports Limited to convert the debentures into equity after a certain due date. The ld. Assessing Officer while examining the said transactions came to the conclusion that the said transaction is in the nature of loans and advances received by the assessee company from the two concerns, namely, Nagreeka Foils Ltd. and Indian Overseas Exports Limited and since both these concerns are having sufficient reserves and surplus as on the date of applying for the debentures and the same being higher than the amount applied for debentures, Section 2(22)(e) of the Act is applicable and the alleged sum is to be treated as deemed dividend in the hands of the assessee company. 12.1. We further notice that the ld. CIT(A) while dealing with the said issue and also discussing the decision of the Co-ordinate bench of ITAT Delhi in the case of Sahara India Commercial Corpn. Ltd. (supra) observed that in the subsequent years both the entities have not exercised the option of conversion of 0%OFCD and finally the alleged sum was given back to these two concerns. By way of this arrangement, the assessee company has enjoyed the interest free fund for specified period and when its purpose was fulfilled then the alleged sum was paid bank. The ld. CIT(A) confirmed the addition u/s 2(22)(e) of the Act observing as follows:- “4.3.1. I have perused the order of the*AO and also considered the submission of the appellant company. The provision of deemed dividend brought on the statute book to tax those companies who does not pay dividend to the companies and by giving them 12 I.T.A. No. 427/Kol/2019 Assessment Year: 2009-10 C.O. No. 19/Kol/2021 Assessment Year: 2009-10 M/s. Nagreeka Synthetics Pvt. Ltd. gratuitous loan or advance avoid paying Dividend Distribution Tax. The provision of deemed dividend is a deeming provision which deems loans and advances under certain situation as dividend and tax the recipient for said dividend. Therefore, the purpose of bringing provision of deemed dividend is to address this mischief. In the present case the appellant company has issued OFCDs to the group companies in which it has substantial interest. Being issued at 0% interest nothing is to be paid by these subscribing companies. From the record I have noticed that in subsequent years both the entities have not exercised the option of conversion of said OFCDs into equity shares. In substance, the appellant company has enjoyed the interest free fund for specified period and when its purpose was fulfilled than the OFCDs was redeemed. In my view, in form it is an OFCDs but in substance it is loan and advance only. Audit certifications by both statutory and tax auditors also confirms this position. I have gone through the case laws relied upon by the Ld. AR and found that these cases are not applicable to the facts of the case as they are related to Inter corporate deposits and which is totally different from the OFCDs. 4.3.2. The Hon’ble Delhi ITAT in DCIT -vs.- Sahara India Commercial Corporation [ITA No. 5772/DeL/2010] has held that Optionally Fully Convertible Debentures (OFCDs) do not fall under and cannot be equated with receipt of loan' or 'deposit' under the provisions of Section 269SS of the IT Act, accordingly, no violation of the said Section can be said to have been committed by the assessee to attract penalty u/s 271D. However this judgement is not in the context of deemed dividend but in the context of penalty for taking Loans/deposits where the test is much stricter on the revenue. 4.3.3. OFCD has two parts one is loan part and the second part is option to subscribe to the shares of the company. The cost of the option is the interest on loan foregone by the issuer. Both the parts of OFCD can be looked independently. As far as loan part is concerned that will trigger provisions of section 2 (22) (e). Further the OFCD has been privately placed on an associate concern. It is also seen that the OFCD has subsequently been redeemed and no shares have been subscribed against it as noted by the AO. Any loan transaction today can be converted into a derivative transaction with the help of simple financial engineering. If these derivatives are excluded from the perview of 2(22)(e), then all the large taxpayers would escape the provisions of 2(22)(e) by simple financial engineering and this provision would become instrument of taxation only for small tax payers who don't have recourse to such financial engineering. As discussed above an OFCD has two parts one is loan part and the second part is option to subscribe to the shares of the company. The cost of the option is the interest on loan foregone by the issuer. Both the parts of OFCD can be looked independently. As far as loan part is concerned that will trigger provisions of section 2 (22) (e). In view of the above discussion the ground is dismissed.” 14. On perusal of the above finding as well as on going through the submissions of the ld. Counsel for the assessee, we find that a point of dispute is that whether the 0% Optionally Fully Convertible Debentures can be equaled to loans and advances. Section 2(22)(e) of 13 I.T.A. No. 427/Kol/2019 Assessment Year: 2009-10 C.O. No. 19/Kol/2021 Assessment Year: 2009-10 M/s. Nagreeka Synthetics Pvt. Ltd. the Act having direct bearing on the issue on hand and the same reads as follows:- “(e) any payment by a company, not being a company in which the public are substantially interested, of any sum (whether as representing a part of the assets of the company or otherwise) [made after the 31st day of May, 1987, by way of advance or loan to a shareholder, being a person who is the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) holding not less than ten per cent of the voting power, or to any concern in which such shareholder is a member or a partner and in which he has a substantial interest (hereafter in this clause referred to as the said concern)] or any payment by any such company on behalf, or for the individual benefit, of any such shareholder, to the extent to which the company in either case possesses accumulated profits; 15. Now, Section 2(22)(e) of the Act refers to any payment by a company by way of advance or loan to shareholder. Though there are certain exceptions provided u/s 2(22)(e) of the Act but they are not in dispute before us. It is also not disputed that the assessee is a substantial shareholder in both the companies, namely, Nagreeka Foils Ltd. and Indian Overseas Exports Limited. The dispute is only with regard to the said sum received by the assessee as to whether it is a loan or advance or not. The assessee company has issued debentures (0%OFCD) and ld. Counsel for the assessee has contended that it is not a loan or advance but it is a security. Reference has also been made to the decision of the Co-ordinate Bench of ITAT Delhi in the case of Sahara India Commercial Corporation (supra), where it has been held that OFCDs are not to be treated as loans or deposits. But on perusal of the said decision, we find that the issue before the Co- ordinate Bench was regarding accepting of loans or deposits u/s 269SS of the Act. The debentures were not treated as loans or deposits by the 14 I.T.A. No. 427/Kol/2019 Assessment Year: 2009-10 C.O. No. 19/Kol/2021 Assessment Year: 2009-10 M/s. Nagreeka Synthetics Pvt. Ltd. Co-ordinate Bench on the ground that for issuing the debentures, a proper procedure has to be followed by the company and information has to be given to the Ministry of Corporate Affairs for such transactions. Since Section 269SS of the Act refers to loans or deposits by way of account payee cheque or draft exceeding Rs.20,000/- (at that point of time), as the information about such debentures were not appearing in the audit report providing information u/s 269SS of the Act, OFCDs were not treated as loans or deposits. However, in the instant case, the issue is not regarding Section 269SS of the Act but it is regarding Section 2(22)(e) of the Act. Section 2(22)(e) of the Act just refers to the payment b way of advance or loans. Now, whether loans or advances include debentures or not is the question before us. The debenture is a type of long term business debt not secured by any collateral, it is a funding option for companies that have solid financials and want to avoid issuing shares and diluting their equity. A debenture is a receipt or certificate that acknowledges a debt which someone owns. Debentures are normally issued with a fixed interest rate and the company which issues a debenture has to pay interest on such debenture as per the credit terms. Even though the ld. Counsel for the assessee has contended that it is a security but that is for the purpose of listing with the stock exchanges but the basic purpose of debenture is to avail loan. In the instant case, the assessee has issued debentures of 0%OFCD. 15.1. At the time of issuing it was purely in the nature of debentures with an option of changing it into equity. The basic purpose for issuing 15 I.T.A. No. 427/Kol/2019 Assessment Year: 2009-10 C.O. No. 19/Kol/2021 Assessment Year: 2009-10 M/s. Nagreeka Synthetics Pvt. Ltd. such debentures was to receive loan from the companies, namely, Nagreeka Foils Ltd. and Indian Overseas Exports Limited and just nomenclature was changed from loan to OFCD but the fact remains is that it is a loan taken by the assessee from these two companies. In Section 2(22)(e) of the Act, the word debentures has not been excluded from the category of loans and advance and, therefore, since the basic purpose of issuing debentures is to take loan, we are of the considered view that alleged sum received by the assessee company is a loan or advance on which Section 2(22)(e) of the Act, squarely applies. The ld. CIT(A) has given a categorical finding that in the subsequent period, such debentures have not been converted and finally an amount which was given by two concerns, namely, Nagreeka Foils Ltd. and Indian Overseas Exports Limited, has been returned back to them by the assessee company. It thus brings us to a conclusion that issuing of 0%OFCD with no final action on the same is in the nature of colorable device to avoid applicability of Section 2(22)(e) of the Act. Therefore, since as on the date of issuing debentures the accumulated reserves and surplus with both the companies issuing the same to the assessee was much higher than the amount given towards debentures and the said transactions is basically a loan given by the companies in which the assessee is having substantial voting power as provided in Section 2(22)(e) of the Act, ld. CIT(A) was justified in confirming the addition for deemed dividend u/s 2(22)(e) of the Act. Ground Nos. 1 & 2 raised by the assessee in the cross-objection are hereby dismissed. 16 I.T.A. No. 427/Kol/2019 Assessment Year: 2009-10 C.O. No. 19/Kol/2021 Assessment Year: 2009-10 M/s. Nagreeka Synthetics Pvt. Ltd. 16. In the result, the appeal of the revenue is allowed for statistical purposes and the cross-objection by the assessee are dismissed. Order pronounced in the Court on 9 th November, 2023 at Kolkata. Sd/- Sd/- (SANJAY GARG) (DR. MANISH BORAD) JUDICIAL MEMBER ACCOUNTANT MEMBER Kolkata, Dated 09/11/2023 *SC SrPs आदेश कᳱ ᮧितिलिप अᮕेिषत/Copy of the Order forwarded to : 1. अपीलाथᱮ / The Assessee 2. ᮧ᭜यथᱮ / The Respondent 3. संबंिधत आयकर आयुᲦ / Concerned Pr. CIT 4. आयकर आयुᲦ)अपील (/ The CIT(A)- 5. िवभागीय ᮧितिनिध ,आयकर अपीलीय अिधकरण, कोलकाता/DR,ITAT, Kolkata, 6. गाडᭅ फाई/ Guard file. आदेशानुसार/ BY ORDER, TRUE COPY Assistant Registrar आयकर अपीलीय अिधकरण ITAT, Kolkata
