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As per AS -19 Advance for lease should be recognized proportionately over the period of lease

HIGH COURT OF BOMBAY

Commissioner of Income-tax

versus

Reliance Communication Infrastructure Ltd.

IT Appeal No. 4727 of 2010

October 22, 2012

JUDGMENT

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.

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 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 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 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-assessee 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 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-assessee 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 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 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:

(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:

(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.

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 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) :

7. 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 matter of J.K. Industries Ltd. v. CIT [2008] 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.

8. 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.

9. In view of the above the appeal is dismissed . No order as to costs.


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