Commissioner Of Income Tax, ... vs Rbg Investment & Finance Ltd.
2008 Latest Caselaw 1078 Del

*             THE HIGH COURT OF DELHI AT NEW DELHI

%                                    Judgment delivered on : 21.07.2008

+              ITA No.918/2007, 919/2007, 920/2007 & 1034/2007


COMMISSIONER OF INCOME                                         ..... Appellant
TAX, DELHI-V.
                   -versus-

RBG INVESTMENT & FINANCE                                     ..... Respondent

LTD

Advocates who appeared in this case:

For the Appellant : Mr. Sanjeev Sabharwal For the Respondent : Mr. Sampath Krishnan & Mr. K Sampath

CORAM :-

HON'BLE MR JUSTICE BADAR DURREZ AHMED HON'BLE MR JUSTICE RAJIV SHAKDHER

1. Whether the Reporters of local papers may be allowed to see the judgment ?

2. To be referred to Reporters or not ?

3. Whether the judgment should be reported in the Digest ?

BADAR DURREZ AHMED, J (ORAL)

1. These four appeals relate to the assessment years 1992-

93, 1993-94, 1994-95, & 1995-96 and they are directed against the

common order passed by the Income Tax Appellate Tribunal dated

31.01.2007.

2. The issue sought to be raised by the appellant pertains to

the arrangement made between the assessee and certain mutual funds

such as PNB Mutual Fund, LIC Mutual Fund, & SBI Mutual Fund

with regard to subscription of fully convertible debentures, offered

as a rights issue by the assessee's sister concern (Steel Tubes India

Ltd). Since the assessee held shares in (Steel Tubes India Ltd), an

offer was made to it as of right for subscription to fully convertible

debentures by Steel Tubes India Ltd. The assessee did not have the

wherewithal at that that point of time to subscribe to the said offer.

And, even its efforts to raise loans in the ordinary course did not

materialise. Therefore, it entered into the said agreements with the

aforesaid mutual funds. The agreements being that the mutual funds

would undertake to subscribe to the fully convertible debentures

subject to the condition that the assessee would buy-back the

debentures after conversion after 36 months. So that the mutual

funds are fully compensated for subscribing and retaining the fully

convertible debentures on behalf of the assessee, the assessee agreed

to pay service charges to the mutual funds at pre-determined rates.

The question that is sought to be raised by the learned counsel for

the appellant is that these service charges which have been allowed

as business expenses under Section 37 (1) of the Income Tax, 1961,

by the Tribunal ought not to have been allowed because the same

were not wholly and fully incurred for the business of the assessee as

a trader in shares. The argument advanced by the learned counsel is

that the object behind the said subscription and the buy-back

arrangement was to help the sister concern by ensuring that the offer

by the sister concern was fully subscribed and not for the business

purposes of the assessee itself.

3. The tribunal, after considering the material on record

and the arguments advanced on both sides, came to the conclusion

that the substance of the agreements between the assessee and the

mutual funds was in the nature of a financing arrangement wherein

mutual funds were assured fixed rates of returns and the assessee

was able to obtain the fully convertible debentures of sale debentures

only with a view to make profits. The tribunal also noted that the

rights issue was, in fact, over subscribed by 15 % and

consequently, the tribunal negated the observations of the Assessing

Officer that the entire deal was arranged through the assessee

company to ensure the subscription of the rights issue.

4. It is also admitted position that the offer made to the

assessee on the basis of shares held by it in Steel Tubes India Ltd

constituted only 10% of the entire offer, as noted in the

Commissioner of Income Tax (Appeal's) order for the assessment

year 1993-94 dated 05.06.2000 in paragraph No. 1.19. Since the

offer had been over subscribed by 15 %, it is obvious that the

argument advanced by the learned counsel for the appellant that the

whole object behind the subscription was to ensure that the sister

concern's issue was fully subscribed, cannot be accepted. The

tribunal's finding to this effect cannot be faulted.

5. The tribunal also found that the course of action adopted

by the assessee was because it appeared to the assessee that in view

of the then prevailing market condition, it would make substantial

profits by selling the fully convertible debentures after conversion.

It is another matter that by the time the debentures were converted

and the shares became sale-able, the market crashed because of the

infamous Harshad Mehta's scam. The tribunal concluded that this

did not entail that such a transaction be construed as a "non business

transaction". The tribunal came to the conclusion that the service

charges were allowable expenses under Section 37 (1) of the Income

Tax Act 1961, in as much as, they were wholly and exclusively

expended for the business of the assessee. This is a finding of the

fact. We find no perversity in this finding of the tribunal. No

substantial question of law arises for our consideration.

6. These appeals are dismissed.

BADAR DURREZ AHMED, J

RAJIV SHAKDHER, J

July 21, 2008 mk