Bombay High Court
The Commissioner Of Income Tax-7 vs Pan No.Aaccs2157H on 22 October, 2012
Bench: J.P. Devadhar, M.S. Sanklecha
ASN 1 ITXA-4727(final).doc
IN THE HIGH COURT OF JUDICATURE AT BOMBAY
ORDINARY ORIGINAL CIVIL JURISDICTION
INCOME TAX APPEAL NO. 4727 OF 2010
The Commissioner of Income Tax-7,
Aayakar Bhavan, M.K.Road,
Mumbai-400020. ..Appellant.
v.
M/s. Reliance Communication Infrastructure Ltd.,
C Block, 1st floor, Dhirubhai Ambani Knowledge City,
Koparkhairane, Navi Mumbai-400 710.
Pan No.AACCS2157H. ..Respondent.
Mr .Suresh Kumar for the Appellant.
Mr. S.E. Dastur, Sr. Advocate with Mr. Niraj Seth with Mr. B.G.
Yewale i/by Rajesh Shah & Co. for the Respondent.
CORAM : J.P. DEVADHAR AND
M.S. SANKLECHA, JJ.
DATE : 22ND OCTOBER, 2012
JUDGMENT ( Per M.S. SANKLECHA, J.):
This appeal by the revenue under Section 260A of the
Income Tax Act ("the Act") challenges the order dated 21/8/1989
passed by the Income Tax Appellate Tribunal ("the Tribunal")
relating to the assessment year 2004-05.
ASN 2 ITXA-4727(final).doc
2) Being aggrieved the appellant revenue has formulated
the following questions of law for the consideration of this Court:
a) Whether on the facts and in the
circumstances of the case and in law the
Tribunal was justified in holding that the order
u/s. 143(3) dated 22.12.2006 was not erroneous
and prejudicial to the interest of the revenue
when the shares were transferred for settlement
of debt of Rs.50 crores and so the borrower got
the benefit of remission of debt liability and
consequences of non repayment and the full
value of consideration in this case was not only
the principal component of debt but also the
difference between the fair market value and the
cost of shares?
b) Whether on the facts and circumstances of
the case and in law, the Tribunal was justified in
holding that the order u/s. 143(3) dated
22/12/2006 was not erroneous by holding that
the lease hold rights are acquired on periodic
ASN 3 ITXA-4727(final).doc
payments of lease rent received as advance rent
even though the assessee has received IRC
fees in one go and the entire income accrued to
the assessee in A.Y. 2004-05?
3) The facts leading the present appeal are as under:
a) On 1/11/2004 the respondent-assessee filed its return
of income for the Assessment year 2004-05 declaring a loss of
Rs.277 crores. The return was also accompanied by computation
in accordance with the provisions of Section 115 JA of the Act.
The respondent-assessee's case was taken up for scrutiny and
thereafter on 22/10/2006 an assessment order was passed under
Section 143(3) of the Act determining the loss at Rs.276 crores
under the normal provisions of the Act and determining the
income of Rs.394 crores under the provisions of Section 115 JB of
the Act.
b) The Commissioner of Income Tax on review found that
the assessment order dated 22/12/2006 appeared to be
erroneous and prejudicial to the interest of the revenue on two
counts. Consequently, notices for revision under Section 263 of
ASN 4 ITXA-4727(final).doc
the Act were issued to the respondent-assessee on the following
grounds:
(i) that 50 crores shares of Reliance Infocomm Ltd.
(RIL) were transferred at the rate of Rs.1/- per share
( the face value per share) to one Mukesh Ambani
when the market value of the share was Rs.53.01 per
share. Therefore, the notice proposed to assess a sum
of Rs.2635 crores as a short term capital gain being a
difference between market value per share of
Rs.53.71 and face value per share was Rs.1/-.
(ii) amount of Rs.3037 crores received from
Reliance Infocomm Ltd. as fees for grant of
Indefeasible Right of Connectivity (IRC) for a period of
20 years was income accrued to the assessee in the
assessment year 2004-05 itself.
c) The respondent-assessee responded to both the notices
and contended that 50 crores shares of the face value of Rs.1/-
per share were given as pledge to one Mukesh Ambani for an
amount of Rs.50 crores borrowed from him and there was no sale
of shares. Alternatively, it was contended that at the highest the
ASN 5 ITXA-4727(final).doc
short term capital gain could be on the basis of Rs.50 crores
received as consideration for sale of the shares and not the
market value of the shares. So far as the second ground was
concerned viz. Rs.3037 crores received from Reliance Infocomm
Ltd. it was pointed out that the respondent -assesee were the
owners of nationwide network of multiple conduit (LDCA) (long
distance calling area). In that capacity the respondent-assessee
had entered into an agreement with Reliance Infocomm Ltd. giving
it non exclusive ig IRC right to use the nation wide network of
multiple conduit for a period of 20 years and in consideration
thereof received Rs.3037 crores. This amount was in the nature
of an advance and on a pro-rata basis an amount of Rs.63.28
crores for a period of 5 months from November 2003 to March,
2004 had been offered for tax as income for the assessment year
2004-05. Besides the respondent-assesee also contended that the
exercise of powers of revision under Section 263 of the Act cannot
be exercised as the conditions precedent for the exercise thereof
namely that the assessment order should be erroneous and also
be prejudicial to the interest of the revenue were not satisfied.
d) In spite of the above submissions the Commissioner of
Income Tax by an order dated 9.3.2009 held that the
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assessment order dated 22/12/2006 was erroneous as well as
prejudicial to the interest of the revenue and he exercised
powers under Section 263 of the Act. On merits he held that there
had been a sale and a difference of Rs.2635 crores (between
market value of the shares and the face value of the shares) is
assessable to tax as short term capital gain. So far as the amount
of Rs.3037 crores is concerned he held that the entire amount of
Rs.3037 crores received as fees for IRC is income chargeable to
tax for the assessment year 2005-06.
e) Being aggrieved, the respondent-assessee filed an
appeal to the Tribunal. By an order dated 21/8/2009 the Tribunal
allowed the respondent-assessee's appeal not only on the ground
that the exercise of powers of revision under Section 263 of the
Act was not called for but also on merits. The Tribunal recorded a
finding of fact that there was no transfer/sale of 50 crores shares
of Reliance Infocomm Ltd but only transaction of loan by pledge of
shares for the purpose of securing a loan of Rs.50 crores taken
from one Mukesh Ambani. So far as tax-ability with regard to
amount of Rs.3037 crores received as IRC fees from Reliance
Infocomm Limited under agreement dated 30.4.2003 is
concerned, the Tribunal after a detailed examination of the
ASN 7 ITXA-4727(final).doc
Agreement concludes Reliance Infocomm Limited has only a right
to use the net work during the tenure of the agreement. This was
so as the agreement was in the nature of a lease between
Reliance Infocomm Ltd. and the respondent-assessee. Further,
the agreement could be terminated at the sole discretion of
Reliance Infocomm Ltd. Therefore the Tribunal by placing
reliance upon Accounting Standards formulated by the Institute of
Chartered Accountants concluded that the fees had to be spread
over the period of the lease as the entire fees had not accrued
during the assessment year 2004-05. The Tribunal upheld the
treatment given by the respondent-assessee to the IRC fees
received from Reliance Infocomm Ltd. by having offered an
amount of Rs.63.28 crores as the income accrued for the five
months between November 2003 to March 2004. Further, the
Tribunal held that the condition precedent to invoke powers under
Section 263 of the Act did not exist and the same was incorrectly
exercised by the Commissioner of Income Tax.
4) Mr. Suresh Kumar in support of the appeal places
reliance upon the order of the Commissioner of Income Tax dated
9/03/2006 and submits as under:
ASN 8 ITXA-4727(final).doc
(i ) There is a sale of 50crore share of Reliance Infocomm
ltd. to one Mukesh Ambani as is evident from the fact that
the shares were de materialized from the respondent-
assessee's account to one Mukesh Amabani's account.
Consequently the market value of the 50 crores share is to
be taken as consideration to arrive at the short term capital
gains; and
(ii) The amount of Rs.3037 crores received as IRC fees is
the fees received for an indefeasible right and therefore the
income has accrued in the Assessment year 2004-05. It is
relevant to note that in that very year there was an addition
of plant and machinery valued at Rs.3040 crores and
depreciation on the same was also claimed. Therefore the
entire amount received as fees should be offered to tax;
Therefore it was submitted by Mr. Suresh Kumar that the
appeal be admitted.
5) As against the above, Mr. Dastur Senior Counsel on
behalf of the Respondents supports the Order of the Tribunal and
submits:
ASN 9 ITXA-4727(final).doc
(i) There was no transfer of 50 crore shares to one Mukesh
Ambani (then Managing Director of the respondent-
assessee) but a mere pledge for a loan of Rs.50 crores.
The fact that there was no sale but only a loan of Rs.50
crores for which the pledge was created is evident from
Audited annual accounts for the assessment year 2004-
05 and 2005-06; It was also submitted that the loan was
returned in December 2004 and the 50 crores shares
were received back by the respondent-assessee.
(ii) The amount of Rs.3037 crores received as IRC fees is
fees received for a period of 20 years and therefore it
cannot be said to have accrued in the year of receipt.
This was particularly so as the there was unilateral right
to terminate the Agreement dated 30.04.2003 with M/s.
Reliance Infocomm Ltd.
In view of the above, it was submitted by Mr. Dastur
that the appeal be dismissed.
ASN 10 ITXA-4727(final).doc
Re.: Question (a)
6) The Tribunal has on consideration of all facts
concluded that there was no transfer of shares but only a pledge
of shares for the purposes of obtaining a loan. This short term
loan of Rs.50 crores was repaid on 24.12.2004 as is evident from
audited accounts and annual reports for the assessment year
2004-05. The audited accounts show that that the amount of
Rs.50 crores had been received as a loan. Further the balance
sheet filed for assessment year 2005-06 also shows that an
amount of Rs.50 crores shown under the head other loans as on
31/3/2004 was shown as nil as on 31/3/2005. In case it was not a
loan, as rightly observed by the Tribunal there would have been
no occasion to repay the amounts. Further the appellant before
us has not disputed the fact of return of loan and also the receipt
of pledged shares from Mukesh Ambani. In fact, the evidence in
the form of transaction statement of Demat Account dated
24/12/2004 was produced at the time of hearing showing the
return of 5-crores shares of Reliance Infocomm Limited to the
respondent on 24/10/2012 i.e. the date when the loan was
returned by the respondent to one Mukesh Ambani. Besides, the
finding of the Tribunal is a finding of fact and the revenue has not
ASN 11 ITXA-4727(final).doc
been able to show that the same was in any manner perverse.
Consequently, question (a) does not raise any substantial
question of law and is dismissed.
Re Question (b) :
11) So far as the second issue is concerned, the Tribunal
has on examination of the agreement dated 30/4/2003 entered
into between Reliance Infocomm Ltd. and the respondent-
assessee concluded that Reliance Infocomm Ltd. in terms of the
agreement had only a right to use the net work during the tenure
of the 20 year agreement. Further that the agreement was liable
to be terminated at the sole discretion of Reliance Infocomm Ltd.
and consequently, the amount received as advance for 20 years
lease period would have to be returned on such termination for
the balance un-utilized period. Further the Tribunal held that the
Agreement dated 30/04/2003 was only in the nature/form of a
lease agreement. On application of the Accounting Standards
(AS-19) formulated by the Institute of Chartered Accountants of
India, a lease income arising from operating lease should be
recognized in the statement of profit and loss in a straight line
method over the term of the lease. Further the Apex Court in the
ASN 12 ITXA-4727(final).doc
matter of J.K. Industries ltd. v. CIT reported in 297 ITR 176 has
up held the theory of matching principles and application of
accounting standards so as to avoid distortion of income.
Therefore, the respondent assessee had in terms of AS-19
correctly spread the entire fee of Rs.3037 crores over the period
of 20 years and to pay tax thereon over the entire period. In view
of the above, question (b) does not raise any substantial question
of law and therefore is dismissed.
12)
The present appeal as filed by the revenue is also
required to be dismissed as the revenue has not challenged the
order of the Tribunal holding that exercise of powers of revision
under Section 263 of the Act by the Commissioner of Income Tax
was bad in law. Once the revenue has accepted the finding of the
Tribunal that the Commissioner of Income Tax could not have
exercised the powers under Section 263 of the Act, no occasion to
examine the two questions raised by the revenue can arise. In
view of the above, the questions raised are merely academic and
need not be entertained.
ASN 13 ITXA-4727(final).doc
13) In view of the above the appeal is dismissed . No order
as to costs.
(M.S.SANKELCHA, J.) (J.P. DEVADHAR, J.)
