PCIT vs. Aditya Birla Telecom Ltd (Bombay High Court)

IN THE HIGH COURT OF JUDICATURE AT BOMBAY
O.O.C.J.
INCOME TAX APPEAL NO. 1502 OF 2016
Pr. Commissioner of Income Tax -14
426, Aaykar Bhavan,
Churchgate, Mumbai – 400 020. .. Appellant
Versus
M/s. Aditya Birla Telecom Ltd
5th Floor, Windsor Off. CST Rd,
Kalina, Santacruz (E),
Mumbai.
PAN: AAACA5315A .. Respondent
……………….
• Mr. Suresh Kumar a/w Ms. Sumandevi Yadav for the Appellant
• Mr. Jehangir Mistri, Senior Counsel a/w Mr. Madhur Agrawal i/b
Atul Jasani for the Respondent
……………….
CORAM : AKIL KURESHI &
SARANG V. KOTWAL, JJ.
DATE : MARCH 26, 2019.
ORAL JUDGMENT (Per Akil Kureshi, J.)
1. This appeal is filed by the Revenue to challenge the
judgment of the Income Tax Appellate Tribunal (“the Tribunal”
for short) raising following question for our consideration:-
“Whether on the facts and in the circumstances of the case and in
law, the Tribunal is correct in deleting the addition of Rs. 2098.25
crores made under Section 68 of the I.T. Act, 1961?”
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2. Brief facts are as under:-
3.1 Respondent assessee, M/s. Aditya Birla Telecom Ltd is a
registered company and is engaged in providing
telecommunication services. While assessing the company’s
return of income for the assessment year 2009-10, the
Assessing Officer noticed that the assessee company had
issued 19,25,000 preference shares, each of the face value
of Rs. 10/- to one P5 Asia Holding Investment (Mauritius) Ltd
(hereinafter referred to as “P5AHIML”) at Rs. 10,890/- per
share. Through allotment of these shares, thus, the
company had received the share amount of Rs. 1,92,50,000/-
and total premium of Rs. 2096.32 crores (rounded off). The
company had thus received total sum of Rs. 2098.25 crores.
The dividend would be paid at the rate of 0.00001% per
annum on the face value of the preference shares. Upon
completion of period of ten years of issuance of preference
shares, the same would be converted into equity shares at a
premium of Rs. 10,890/- per share. The Assessing Officer
noticed that the assessee’s holding company M/s. Idea
Cellular Limited and its nominee owed 1,00,00,000 equity
shares of Rs. 10/- each. He was of the opinion that the
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assessee had received share capital towards preference
shares from P5AHIML at terms which were so adverse to
P5AHIML, that no prudent businessman would ever agree to
subscribe to preference shares on such terms.
3.2 On such basis, the Assessing Officer initiated
inquiry into the assessee receiving such sum of Rs. 2098.25
crores, whether the same would be covered by Section 68 of
the Income Tax Act, 1961 (“the Act” for short). The Assessing
Officer, therefore, called upon the assesee to prove the
identity of the investor, its capacity to make such investment
and the genuineness of the transaction. In furtherance of the
same, the Assessing Officer asked the assessee to provide
various details such as the proof of identity, financial
capacity of P5AHIML, copy of the annual report, assessment
orders and financial statements of P5AHIML for the last two
years, justification for such huge premium charged etc.
3.3 The assessee supplied the desired documents and
made submissions why according to the assessee, the
transaction being genuine, Section 68 of the Act had no
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applicability.
3.4 Rejecting the submissions of the assessee, the
Assessing Officer passed the order of assessment holding
that the assessee had failed to prove the genuineness of the
transaction of the receipt of funds amounting to Rs. 2908.25
crores from P5AHIML. He, therefore, invoked Section 68 of
the Act and made addition of the said sum in the hands of
the assessee. In the process, he relied on following factors:-
(i) The assessee had used only a sum of Rs. 7.31 crores
received from P5AHIML for its own operation, the balance
amount was transferred to Idea Cellular Ltd (holding
company) or to Idea Cellular Infrastructure Services Ltd
(another group company) for the purpose of other
investment;
(ii) In his opinion, there was no reason why P5AHIML should
have transferred such huge amount without any apparent
return;
(iii) The assessee failed to produce the assessment order of
P5AHIML;
(iv) In the opinion of the Assessing Officer, P5AHIML
representing Province groups and the assessee
representing Idea group were front companies;
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(v) The assessee had opened the bank account in HSBC
Bank only for receipt of funds from P5AHIML which was
closed shortly after the transfer of funds;
(vi) In the opinion of the Assessing Officer, culmination of
these facts would be that the subscription of the preference
shares by P5AHIML was colourbale device and not
genuine transaction.
3.5 The assessee carried the matter in appeal. In
appellate proceedings, the CIT(A) allowed the assessee to
produce on record certain documents which did not form part
of the assessment proceedings and called for remand report
from the Assessing Officer. The CIT(A) dismissed the appeal.
Perusal of this order would show that the assessee having
approached the Bombay High Court in a Writ Petition seeking
stay against the recoveries, the High Court, while disposing
of the Writ Petition had desired that the Commissioner should
dispose of the appeal within three months. The
Commissioner in the order referred to the contentions of both
sides as also the decisions cited before him. He also noted
that after allowing the assessee to produce additional
documents which could not be produced earlier, he had
called for remand report. In his concluding remark in the
appellate order, he stated as under:-
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“…. As the documents furnished by appellant are under investigation
and verification which was stated in remand report of A.O. Under
these circumstances, I uphold the order of the A.O. These grounds
of appeal are dismissed. Appeal order was passed to comply with
Hon’ble Bombay High Court direction.”
The assessee thereupon approached the Tribunal. The
Tribunal, by the impugned detailed judgment, allowed the
assessee’s appeal.
3. We will take note of the contents of the order of the
Tribunal at a later stage. We may, however, record that the
Tribunal in the said judgment concluded as under:-
“29. After analyzing the above documents we can safely conclude
that P5 Asia is a company belonging to the Providence Equity
Partners (“PEP”), a global private investment group specializing in
media, entertainment, communication and information companies,
managing funds of USD 22 billion and having investments in over 100
companies spread over 20 countries. P5 Asia has registered itself as
a Foreign Venture Capital Investor (“FVCI”) with Securities and
Exchange Board of India (“SEBI”). Approvals were also taken from
the Foreign Investment Promotion Board (“FIPB”). The investment in
CCPS of the assessee was made after PS Asia registered as a FVCI
with SEBI and the assessee obtained the necessary approvals from
the FIPB. In connection with the issue of CCPS, the assessee
submitted all the relevant details in the course of the assessment
proceedings. Accordingly, all the three ingredients of section 68 of
the Act i.e. identity, genuineness and creditworthiness of investor are
duly established.”
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4. It is against this judgment of the Tribunal that the
Revenue has filed this appeal.
5. Appearing for the Department, learned counsel Mr.
Suresh Kumar submitted that the Assessing Officer had
analyzed the facts on record and had cited proper reasons to
come to the conclusion that the entire transaction was not
genuine. The assessee had through complex web of
corporate structures, merely routed its own money. The
Assessing Officer was, therefore, justified in invoking Section
68 of the Act. Learned counsel relied on the decision of the
Supreme Court in the case of Pr. CIT Vs. NRA Iron & Steel(P) Ltd1 to contend that even in the context of share
application money, the genuineness to the transaction is
alway open to the inquiry by the Assessing Officer.
6. Learned counsel Mr. Mistri appearing for the assessee
submitted that the Assessing Officer had proceeded on
entirely erroneous basis. The respondent assessee was
awarded cellular licence for providing telecommunication
services in Bihar and Jharkhand blocks. The assessee
1 [2019] 103 taxmann.com 48 (sc)
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company, therefore, required sufficient funds. The
investment was made by the leading US based company
Providence Equity Partners through a specially constituted
Mauritius based company i.e P5AHIML. The requirement of
issuing shares at high premium was obvious namely in order
to ensure that the holding company does not loose its
majority stake in the assessee company. The Assessing
Officer himself had examined the source of such investment.
Further examination was conducted by the Commissioner
(Appeals). The Assessing Officer in his remand report agreed
that the investments were genuine. The Tribunal has given
elaborate reasons for reversing the orders passed by the
Revenue Authorities. Return of such investments in the form
of dividend was not the only return for the investor as
correctly recorded by the Tribunal. He stated that later on
the investor company had exited with the sizable return on
investments which itself would show the fallacy in the
Assessing Officer’s stand that the transaction was a
colourable device.
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7. As is well known in the context of Section 68 of the Act,
the basic duty would be on the assessee to establish the
genuineness of the transaction, credit worthiness of the
investor and the source of funds. Equally well settled
principle through series of judgments is that the Department
cannot insist on the assessee establishing source of the
source. With this background, we may peruse the impugned
judgment of the Tribunal more minutely.
8. In its decision, the Tribunal noted that the investment
made by P5AHIML was done registering itself with SEBI and
after obtaining necessary approvals from Ministry of Finance.
The application made to the Ministry of Finance contained
full details of the investment, the background of the
transaction, the terms of the agreement, identity of the
investor and the investor group. The Tribunal noted that
P5AHIML was an investment arm of Providence Equity
Partners and the Tribunal had perused the financial
statements which disclosed the flow of funds in the said
P5AHIML. The Tribunal further recorded that while making
such investment, the investor not only looks for dividend or
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interest but also expects return on such investment as
capital appreciation, when the investment finally gets
converted into equity shares. The Tribunal found that this
was the reason why P5AHIML had made the investment in
assessee company. In the opinion of the Tribunal merely
because there were multiple entities involved in such
investment process, would not enable the Assessing Officer
to draw an adverse inference on the financial capacity of
P5AHIML. The Tribunal noted that during the assessment,
the Assessing Officer had called for all necessary details
which were supplied by the assessee. In view of such
materials, it was not open for the Assessing Officer to invoke
Section 68 of the Act. The Tribunal further noted that
information was also sought from Foreign Tax Division with
regard to the genuineness of the investment made by
Providence Equity Partners in P5AHIML. Necessary
information was also received. During the course of hearing
of the appeal, the Commissioner had called for remand
report from the Assessing Officer on the additional evidence
produced on record. In the report, the Assessing Officer had
made remark suggesting that the transactions were genuine.
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The Tribunal also verified the necessary permissions for
remittances of the funds and other relevant documents.
9. It can, thus be seen that at every stage, the full inquiry
of source of funds and other relevant factors in relation to
the investment in question was carried out. The Assessing
Officer himself carried out a detailed inquiry. His initial
suspicion or in other words starting point of inquiry on the
basis that apparently the investor was investing huge
amount which may prima facie appear to be without
adequate possible returns, may be fully justified. However,
when all the relevant factors are properly explained,
including the fact that the payment of dividend was not the
sole attraction for the investor and that the investor could
expect a fair return on the investment, of course, subject to
vagaries of the any business decision, the Assessing Officer
had to advert to all such materials on record in proper
perspective. As noted by the Tribunal, all necessary
permissions and clearances were granted by the Government
of India and other government authorities for such
investment. The source of the funds in the hands of P5AHIML
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was also verified. Merely because multiple corporate bodies
may have been involved in the entire process of collecting
funds in P5AHIML and then investing the same in the
assessee company, by itself would not be sufficient to
establish a sham transaction or colourable device.
10. We further notice that when the Commissioner
(Appeals) had permitted additional evidence to be produced
on record during the appellate proceedings, he had called for
remand report from the Assessing Officer. Such report was
made by him on 27.5.2013. In such report, his remarks were
as under:-
7. On going through the documentary evidence, prima facie it
appears that the identify of P5 Asia Holdings is established through
residency certificate issued by the Mauritius Government. Assessee
has filed documentary evidence of funds transfer vide letter dated
27th May 2013 by filing of copy of bank extracts. Copies of the said
letter along with annexures are enclosed. Prima facie these prove
the genuineness and the financial capacity of the persons making
investment in preference shares. (Zerox Copy of the said
reference enclsoed as Annexure -E).”
11. Thus, the Assessing Officer himself was also prima facie
of the belief that the materials on record prove genuineness
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and financial capacity of the persons making investment.
The Commissioner (Appeals) was under the directive of the
High Court of Bombay to dispose of the appeal within a short
time. It was for this reason that in his appellate order, he
had recorded that further investigation into the additional
documents was pending and therefore, in compliance with
the order of the High Court, he was disposing of the appeal.
Thus, the order of the Appellate Commissioner cannot be
seen as the decision on merits of the matter for which he
found inadequate time available with him. As noted, the
Tribunal carried out the detailed inquiry into all aspects of the
matter and noticed no suspicious movement of the funds.
Merely because the investment was considerably large and
as noted, several corporate structures were either created or
came into play in routing the investment in the assessee
through P5AHIML would not be sufficient to brand the
transaction as colourable device.
12. In the result, the Income Tax Appeal is dismissed.
[ SARANG V. KOTWAL, J. ] [ AKIL KURESHI, J ]
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