High Court-approved capital reduction cannot be recharacterised as a buy-back under Section 115QA.

ORDER

Anubhav Sharma, Judicial Member. – These cross appeals preferred by the assessee and revenue against the common order dated 25.03.2024 of the Ld. National Faceless Appeal Centre (NFAC), Delhi (hereinafter referred to as the First Appellate Authority or ‘the ld. FAA’ for short) in DIN & Order No: ITBA/NFAC/S/250/2023-24/1063325839(1) arising out of the assessment order dated 31.12.2019 u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) passed by DCIT, Circle – 23(2) for AY: 2017-18.

2. Heard and perused the records. The relevant facts are that Assessee has claimed to be engaged in the business of developing commercial real estate property in India. It is primarily involved in developing and leasing investment property in Sector 135, Noida, Uttar Pradesh which has been notified as a SEZ by the Government of India. Being involved in the development of SEZ, the Assessee is eligible to claim deduction of profits derived from the business of development and operation of SEZ under section 80-IAB of the Act for any ten consecutive years out of the fifteen year period. This claim for deduction under section 80-IAB of the Act began in case of the Assessee from AY 2013-14.

2.1 The Assessee had filed its return of income (ROI) for AY 2017-18 on 21 November 2017 declaring a total income of INR 4,33,40,450 under the normal provisions of the Act and reporting book profit of INR 59,11,70,914 under section 115JB of the Act (MAT provisions) and claiming a refund of INR 4,75,51,680. The ROI was picked up for scrutiny assessment and the Ld. AO and in the impugned Assessment order the Ld. AO determined the total income at INR 66,93,96,660 under the normal provisions of the Act after making following additions and/or disallowances.

2.2 Further, the Ld. AO also levied taxes amounting to INR 131,50,69,137 under section 115QA of the Act (buyback tax) on the capital reduction undertaken by the Assessee including interest under section 115P of the Act thereon.

3. Aggrieved by the same, the Assessee filed an appeal against the Assessment order before the Ld. Commissioner of Income-tax (Appeals) and after taking into consideration the submissions and documentary evidences made by the Assessee, the Ld. CIT(A) passed the impugned order and upheld the Assessment order to the extent of following issues/additions:

4. The Assessee being aggrieved by the above additions disallowances upheld by the Ld. CIT(A) has preferred an appeal before this Tribunal and so has the Revenue for the following issued which were adjudicated in favor of the Assessee by the Ld. CIT(A):

5. We have taken into consideration the rival contentions and perused the material on record. We first take the issue arising out of ground 2 to 10 in appeal of assessee, where in ld. AO has levied tax under section 115QA of the Act on the capital reduction carried out by the Assessee and interest levied under section 115P of the Act thereon. The relevant facts for this issue are that the Assessee had issued, subscribed and fully paid-up capital of INR 6,84,890 divided into 68,489 equity shares of INR 10/- each as per the financial statement dated 31 March 2016. These shares were held by BREP India Office Holdings IV Pte. Ltd. (BREP IV), a foreign company, incorporated and registered in Singapore and a tax resident of Singapore. BREP IV was registered as a foreign portfolio investor with the Security and Exchange Board of India.

5.1 During the year under consideration, the Assessee with a view to reduce its share capital as per the provision of section 100 of the Companies Act, 1956 passed a resolution dated 3 June 2016. As per the resolution, it was resolved that to reduce the equity shares of the Assessee held by BREP IV, being in excess of the requirements of the Assessee. Accordingly, vide the Extra Ordinary General Meeting on 6 June 2016, the Assessee passed a resolution to reduce upto a maximum of 53,000 equity shares of the Assessee held by BREP IV.

5.2 Ld. Counsel has claimed that the capital reduction was done in accordance with the provisions of section 100 to 104 and other applicable provisions, if any, of the Companies Act, 1956 read with provisions of section 52 of the Companies Act, 2013, Rule 46 to 65 of Companies (Court) Rules, 1959 and Table F as adopted by the Assessee in its Article of Associations for reducing the issued, subscribed and paid-up share capital. The Assessee proceeded to file a Capital reduction scheme before the Hon’ble Bombay High Court on 27 June 2016 and the Hon’ble Bombay High Court after receiving no objection from the regulatory authorities, approved the scheme vide its order dated 8 September 2016 and the copy of same is available at pages P.B. 192 to 196.

5.3 It is claimed by the ld. Counsel that the reduction of share capital was based on a share valuation report from an independent chartered accountant namely SSPA & Co (here in after referred as Valuor) and copy of same is available at P.B. 197-206. Ld. Counsel has submitted that the Valuation report was part of the Capital Reduction Scheme as filed before the Hon’ble Bombay High Court. In the said report, after applying Discounted Cash Flow Method, the value of each share was determined to be INR 1,29,185.76/-.

5.4 It is claimed that post approval of the scheme by the Hon’ble High Court and in view of the provisions of section 100 to 104 of the Companies Act, 1956, the Assessee cancelled 36,768 shares and remitted an amount equivalent to INR 4,74,98,74,080 to the shareholders viz. BSREP IV. The payments for capital reduction were made using reserves and surplus available with the company amounting to INR 1,19,27,10,658. The Company had also utilised the borrowed funds amounting to INR 3,33,67,95,741.

5.5 Ld. Counsel has pointed out that the Assessee also in compliance with the provisions of Section 2(22)(d) of the Act paid dividend distribution tax (DDT) amounting to INR 27,84,21,093 on the accumulated profit available for distribution in the balance sheet.

6. However, the Ld. AO levied taxes of IN 1,315,069,137 (including interest under section 115P) on the transaction of reduction of share capital by holding that the same as buyback transaction. The Ld. AO has stated that the Assessee reduced its share capital by way of extinguishment or cancellation and Ld. AO but has applied the provisions of Section 115QA of the Act as applicable in case of buy back of shares. Thus rejecting the claim of reduction of share capital. While concluding same the Ld. AO has held that the buyback of shares was a colourable device intended to evade tax and the transaction involved buyback of shares and the same is liable to tax under section 115QA of the Act.

6.1 Ld. Counsel has pointed out that, however, in computation sheet annexed to the Assessment order while taxing the entire sum repatriated to shareholder in hands of the Assessee, Ld. AO has ended up making addition of the same under section 2(22)(d) read with section 115 and levying interest under section 115P which actually is applicable only in the case of capital reduction and not buyback of shares.

7. The Ld. CIT(A) has upheld the impugned findings of ld. AO and has concluded as follows:

8. Ld. Counsel has submitted that after alleging colourable device in the transaction of reduction of share capital the Ld. AO himself, provides credit of DDT already paid undersection 115-0 of the Act amounting to INR 27,84,21,093. Thus, the Ld. AO duly acknowledges and accepts the fact of payment of corresponding taxes on payout in nature of deemed dividend in the hands of BREP IV, i.e,. the Singapore shareholder. However, the Ld. AO/ Ld. CIT(A) after providing the said credit of DDT, did not take into consideration the remaining amount also offered for tax by BSREP IV in its ROI which was duly filed in India (where the capital gains were included) and thereafter accepted by the department vide order under section 143(1) of the Act dated 3 March 2018.

9.1 In this context we find that the computation of income of BREP IV in respect of both the above amounts i.e., payout in nature of deemed dividend (which have been subjected to DDT) and the balance amount which has been shown as capital gains in the ROI. Thus the amount of INR 136,74,90,634 as deemed dividend has already been subject to DDT under section 115-0 of the Act amounting to INR 27,84,21,093 for which due credit has already been accepted and given by the Ld. AO.

9.2 The Ld. AO, however, failed to appreciate that out of the total sale consideration of INR 474,98,74,080, after reducing the said deemed dividend, the balance net sale consideration of INR 338,23,83,446, which has eventually translated into short term capital gains of INR 17,13, 93,913 has duly been offered for tax by BREP IV in its ROI filed in India and which has also been processed by the department and accepted vide intimation under section 143(1) of the Act dated 3 March 2018 by the department. Thus prima facie there appears to be no substance in the allegation of ld. AO that the entire arrangement of the Assessee was a colourable device. The Ld. AO has to look at the arrangement as a whole and not in piecemeal. Reliance in this regard is rightly placed on the decision of Hon’ble Supreme Court in the case of Vodafone International Holdings B.V. v. Union of India 341 ITR 1 (SC):

“68. ……………….. In this connection, one may reiterate the “look at” principle enunciated in W.T. Ramsay Ltd. case (supra) in which it was held that the Revenue or the Court must look at a document or a transaction in a context to which it properly belongs to. It is the task of the Revenue/Court to ascertain the legal nature of the transaction and while doing so it has to look at the entire transaction as a whole and not to adopt a dissecting approach. The Revenue cannot start with the question as to whether the impugned transaction is a tax deferment/saving device but that it should apply the “look at” test to ascertain its true legal nature.”

10. Then we find that to support the allegation of colorable transaction, the Ld. Tax authorities have found ‘capital reduction’ and ‘buy-back’ as same concept under the provision of the Companies Act.

10.1 In this context we find that the Assessee has reduced 36,768 equity shares out of the total 68,489 outstanding equity shares which are more than the limits prescribed under the section 77A of Companies Act, 1956. Thereby, the Assessee’s case falls under the provisions of section 100 to section 104 of the Companies Act, 1956 as approved by the Hon’ble High Court of Bombay.

10.2 Then we find that the provisions of Income-tax Act, 1961 and Companies Act 1956 recognise ‘Capital Reduction’ and ‘Buyback’ as distinct transactions entailing separate scheme / treatment under the respective statutes. Under section 115QA of the Act, the term “buy-back” has been defined to mean ‘purchase by a company of its own shares’. In the case of Assessee the shares held by BREP IV were directly cancelled without the property in the shares passing to the Assessee. Accordingly, the cancellation of the shares cannot be held to be ‘sale’ of shares by BREP IV to the Assessee, and consequently, should not be considered a purchase i.e. buy back by the Assessee.

11. Ld. Counsel has rightly contended that the amendment made in the definition of buy-back’ by Finance Act 2016 was to include the buyback undertaken under other provisions of the Companies Act e.g. under section 391 to section 393 of the Companies Act apart from buy back as per section 77A of the Companies Act and not to include capital reduction as per provision of section 100 to section 104 of the Companies Act, 1956. We find that “Distributed amount” for purposes of section 115QA is to be computed as per rule 40BB of the Income-tax Rules, 1962 which state that the sum returned by the Company out of the amount received is excluded from the amount received in respect of shares. The proviso to sub rule (3) of rule 40BB makes it evident that buy-back and capital reduction are distinct as it recognises that any sum returned to the shareholder could potentially be treated as dividend under section 115-0 and thus should not be reduced.

12. There is also substance in the contention of ld. Counsel that if capital reduction undertaken between period starting from 1 June 2016 to 31 March 2020 are said to be covered by the provisions of section 115QA of the Act, the existing deemed dividend provisions under section 2(22)(d) read with section 115-0 of the Act applicable to capital reduction will result into double taxation, which does not seem to be the intent of the law .

13. We appreciate the contention that the concept of ‘Buy-back of shares was first introduced in the Companies Act of 1956 vide insertion of Section 77A in the year 1999. Before the insertion of Section 77A, the Companies Act did not allow for buy back of shares except with the express order of the Court. On the contrary, Section 77 of the Companies Act of 1956 specifically restricted a company to purchase its own shares.

13.1 The original scheme of the Companies Act of 1956, and precisely Section 77 of the Companies Act was essentially based upon the company law doctrine of capital maintenance. The doctrine of capital maintenance provides that a company must obtain proper consideration for shares that it issues and that having received such capital it must not repay it to members except in certain circumstances is a fundamental principle of company law. Thus, as per the original scheme of the Companies Act of 1956, there was no provision for buy back of shares and only the reduction of share capital was allowed after seeking approval of the scheme or arrangement by the court under sections 100 to 104. Accordingly, ‘Buy-back’ of shares was never contemplated by the legislature at the time of drafting of the Companies Act of 1956. However, Section 77A along with section 77AA and section 77B were inserted by the Companies (Amendment) Act, 1999 (w.e.f. 31-10-1998) pursuant to the Working Committee’s Report to provide for buy-back of its own shares by the company subject to safeguards specified therein. The introduction of the aforesaid sections diluted the general prohibition as imposed by Section 77 of the Companies Act and permitted a company, whether public or private, after following the prescribed procedure to buy back its own securities.

14. Further the Capital reduction Scheme requires an approval of the High Court/NCLT on the scheme filed by the Company. While in case of buy-back approval of High Court/NCLT is not required. Accordingly, if a “capital reduction” is sanctioned by a Court pursuant to the approval at the General meeting, the shareholder thereafter is bound by such order and has no option in the matter. Whereas in case of a “buyback” the shareholder has an option to offer his shares for the “buyback” and the company also has an option to accept or reject the shareholder’s offer.

15. A “buy-back” is also hedged with several other restrictions and conditions, as per the provisions of Section 77A of the Companies Act, 1956 like the company shall not make a further issue of same kind of shares which has been bought back within a period of six months. Such restrictions/conditions are not imposed in case of a “capital reduction”.

16. In case of ‘capital reduction’, capital can be paid back, even if there are no reserves available with the company. However, a buy-back’ can only take place by utilising the free reserves or balances in Securities Premium Account, or there is a fresh issue of any shares or other specified securities.

17. The process of capital reduction involves direct cancellation of shares without actual acquisition of shares by the company undertaking capital reduction. The shares are extinguished by the company on sanctioning of the scheme by the Hon’ble High Court/NCLT. The shares did not exist in the hands of the company and thus cannot have been said to be “re-purchased” or “bought back” by the company on reduction of capital.

18. On the contrary, in case of a buy-back of shares, a company is required to take physical delivery of shares (where the shares are in physical format) or the shares are credited to the Company’s DEMAT account, before they are extinguished. This clearly shows that buy-back is a repurchase of shares. Thus, the provisions relating to reduction of capital are not applicable in respect of buy back of securities under section 77A of the Companies Act, 1956.

19. We also find that there is difference in the two concepts under the Act as well and is evident from the provisions of section 2(22) of the Act pertaining to the definition of dividend. Relevant extract is reproduced as under:

“Dividend’ includes –

……… (d) any distribution to its shareholders by a company on the reduction of its capital, to the extent to which the company possesses accumulated profits which arose after the end of the previous year ending next before theist day of April, 1933, whether such accumulated profits have been capitalized or not;”

20. Therefore, by implication of law, the distribution to shareholder of accumulated profits has to be taxed as dividend. In light of this provision, the Assessee has offered dividend to the extent of accumulated profits amounting to INR 136,74,90,634 which has been duly accepted by the Ld. AO in the assessment order.

21. Then we find that after introducing the provisions of buy-back of shares in the Companies Act, the Act was amended as well. Payment made for Buy-back of shares was expressly excluded from the definition of Dividend. Relevant provisions are reproduced below:

“But ‘dividend’ does not include – (i) ……………….

………. (iv) any payment made by a company on purchase of its own shares from a shareholder in accordance with the provisions of section T7A of the Companies Act, 1956.”

22. The aforesaid exclusion was brought in by the Finance Act of 1999 in light of the changes made in the Companies Act of 1956 and it correspondingly amended the Income-tax Act as well, and introduced section 46A to provide that any consideration received by a shareholder from any company on purchase of its own shares to the extent of the difference between the cost of acquisition and value of consideration so received, subject to provisions of section 48 of the Act. shall be deemed to be the capital gains.

23. It is clear that the legislature deliberately amended the definition of dividend and inserted Section 46A into the Act to bring to tax payment received for Buy-back of shares as Capital Gain. However, the distribution to shareholders in case of capital reduction scheme, continued to be taxed as dividend to the extent of accumulated profits.

24. The difference between the aforesaid two concepts was noted by the Hon’ble Mumbai ITAT in the case of Goldman Sachs (India) Securities (P.) Ltd v. ITO (International Taxation) TDS-3, Mumbai   (Mumbai) as well.

25. Further, reference is invited to the sub-rule 3 of Rule 40BB of the Income-tax Rules, 1962 (‘the Rules) which provides the mechanism to compute amount received by the company in respect of issue of share for calculating distributed income for buy-back of shares.

“40BB (1)………………………

(3) Where the company had at any time, prior to the buy-back of the share, returned any sum out of the amount received in respect of such share the amount as reduced by the sum so returned shall be the amount received by the company for issue of said share:

Provided that if the sum or any part of it so returned was chargeable to additional income-tax under section 115-0 and the company has paid such additional income tax then such sum or part thereof, as the case may be, shall not be reduced.

(Emphasis Supplied)

26. This again re-emphasizes the fact that buy-back and capital reduction are distinct. Therefore, tax under section 115QA should not be levied once the tax has already been discharged under section 115-0 of the Act.

27. Ld. Counsel has relied the decision of the Hon’ble High Court of Bombay in the case of Capgemini India (P.) Ltd., In re [2016] 67  (Bombay) where Hon’ble High Court has specifically held that merely because the company opted for buy-back of shares and not ‘capital reduction’ or vice-versa, the revenue authorities cannot hold that the transaction was for evasion of tax just because the transaction did not attract income-tax. Hence, by opting for a scheme of capital reduction, it cannot be held that the Assessee Company had intended to evade tax by way of a colorable device. Hon’ble Andhra Pradesh High Court in the case of Chetan G. Cholera V. Rockwool (India) Ltd. [2010] 102 SCL 93 (Andhra Pradesh) (AP), has observed that every type of reduction of share capital does not amount to buy-back of shares but every buy-back of shares exercise would certainly involve reduction of share capital.

28. Coming to the reliance of ld. DR on the amendment brought by Finance Bill 2016, we find that the scope of the section 115QA of the Act was enlarged with effected from 1 July 2016 by the Finance Act 2016 by amending the definition of buyback and replaced the words “section TA of the Companies Act, 1956” with “any law for the time being in force relating to companies.” The memorandum to Finance Bill 2016, provided that the above amendment was to cover buy back undertaken under any other provisions of the Act, the extract of the memorandum is reproduced below for reference:

“The existing provisions of section 115QA of the Act provide for the levy of additional Income-tax @ 20% of the distributed income on account of buy back of unlisted shares by a company. The distributed income has been defined in the section to mean the consideration paid by the company on buy back of shares as reduced by the amount which was received by the company for issue of such shares. Buyback has been defined to mean the purchase of a company of its own shares in accordance with the provisions of section 77A of the Companies Act, 1956.

Recently doubts have been raised regarding the effect of buybacks undertaken by the company under different provisions of the Companies Act, 1956 or the Companies Act, 2013 and applicability of provisions of section 115QA to such transactions. An issue has also been raised regarding lack of clarity in determination of consideration received by the company at the time of issue of shares being bought back by the company. There are situations where shares may have been issued by the company in tranches, for different considerations, at different point of time or may have been issued in lieu of existing shares of another company under amalgamation, merger or demerger.

For the purposes of section 115QA, it is the effect of buyback being in the nature of distribution of income which is relevant rather than particular provision of the law relating to companies under which it has been undertaken. Further, lack of clarity in the manner of determination of consideration received by the company would lead to avoidable disputes and also presents a tax arbitrage opportunity of scaling up of consideration particularly under a tax neutral business reorganisation followed by buyback of shares.

In order to provide clarity and remove any ambiguity on the above issues, it is proposed to amend section 115QA to provide that the provisions of this section shall apply to any buy back of unlisted share undertaken by the company in accordance with the provisions of the law relating to the Companies and not necessarily restricted to section T7A of the Companies Act, 1956. It is further proposed to provide that for the purpose of computing distributed income, the amount received by the Company in respect of the shares being bought back shall be determined in the prescribed manner. The rules would thereafter be framed to provide for manner of determination of the amount in various circumstances including shares being issued under tax neutral reorganisations and in different tranches.

The amendment will take effect from 1st June, 2016.

(Emphasis Supplied)

29. The intention behind the above amendment was to cover “buy-back” of shares undertaken under other sections say under section 391 to section 393 of the Companies Act, 1956 apart from the buy-back of shares under section 77A of the Companies Act, 1956 but not to include capital reduction as per provision of section 100 to section 104 of the Companies Act, 1956. Reliance in this regard is place on the judgement Hon’ble Chennai Tribunal in the case of Cognizant Technology Solutions India (P.) Ltd. v. Asstt. CIT (LTU)  309/108 ITR(T) 492 (Chennai – Trib.), the relevant extract of the judgement is reproduced below:

“42. The assessee had also contended that sec. 115QA was amended in 2016 and the present transaction would only be taxable as per the amended provision. Since, the Hon’ble High Court has sanctioned the scheme on 18-4-2016 before amendment came into statute, the enlarged provisions of sec. 115QA of the Act, were not applicable to the case of the assessee. The arguments of the Ld. Counsel for the assessee is not accepted for two reasons. Firstly, there is a distinction between purchase of own shares upon reduction of share capital and buyback. ‘Buyback’ is a term used only in respect of transactions covered u/s.77A. In fact, assessee itself stated in the scheme that it is not a buyback of shares in terms of provisions of sec. 77A of the Act. Therefore, the object behind amendment of sec.115QA has to be read. In our considered view, the amendment to sec.115QA was brought in to clarify that the provisions would apply to buyback of shares u/s.77A as well as to buyback of shares u/s.391-393 of the Companies Act, 1956. Secondly, assuming without conceding that sec.115-QA would govern the transactions from the date of amendment, it would not preclude the transaction from being subject to tax u/s.115-0 of the Act, because, amendment can also be brought in to shift tax incidence from one provision to another. If all conditions of sec.115-0 r.w.s.2(22) are satisfied, the same cannot be impliedly excluded on the basis of the amendment to sec.115QA of the Act.”

(Emphasis Supplied)

30. On the basis of aforesaid discussion we are of considered view that where the two statues Companies Act and the Income Tax Act make provisions for two different methods of re-arranging the share holding pattern and structure and give liberty to a company to adopt the one which suits its need more and the statutes provide the due process of law to do the same, then the conditions laid down for one method cannot by deeming fiction made applicable to another method. The two set of provisions operate in independent fields and leave different purpose for company. A ‘capital reduction’ is at the volition of the Company, for the benefit of the Company, in as much as it has to service a lower capital in future. While, a buy-back, although at the volition of the Company, is for the benefit of the shareholder, in as much as he can exit at a reasonable price, to his satisfaction. In fact, Ld. AO’s treatment of Capital reduction as akin to buy-back of shares will be in direct contradiction to the legislative intent behind introduction of the ‘Buy-back’ provisions which, were introduced to allow company to buy its own securities without the interference of the court.

31. Then we are of considered view that if the Income Tax Act 1961, does provide for any charging provision to consider a transaction recognized under some other statue to be giving rise to any deeming income or gives ld. Tax authorities power to raise a presumption of said transaction to be considered to be substantively an all together different transaction, then the action of the Ld. Tax authorities to rechristen the Hon’ble High Court approved ‘Capital Reduction Scheme’ as per section 100 to 104 of the Companies Act, 1956, as ‘Buy-back’ is beyond the scope of Act and patently incorrect.

32. Thus we are of considered view that ld. Tax authorities below have erred in treating the scheme of capital reduction as akin to that of buyback of shares and findings with consequences deserves to be quashed. The corresponding grounds are thus sustained.

33. Ground 11: This ground arises out of disallowance of interest expenses in relation to the borrowed fund utilised for capital reduction. Ld. AO has disallowed interest expenses, amounting to INR 26,03,48,610/-incurred by the Assessee on the capital borrowed for the purpose of reduction of capital stating that such capital reduction transaction is capital in nature. The Ld. AO further stated it is not a business transaction rather it is for gaining controlling interest from outgoing shareholders and thus cannot be said to be business purpose under section 36(1)(iii) of the Act. The Ld. CIT(A) upheld the disallowance stating that borrowed funds have been used for capital purpose which has enduring benefit to the business of the Assessee. Accordingly, ld. CIT(A) confirmed additions made by Ld. AO stating that since borrowed funds were not utilised for the purpose of business, i.e. construction and operation of infrastructure in SEZ, interest on such borrowed funds should be disallowed. However, the Ld.AO was directed to recalculate the actual interest relating to the borrowed fund that has been claimed as revenue expenditure and consider such amount for disallowance.

34. Ld. Counsel of assessee submits that the Assessee had taken term loan and had utilised its proceeds for capital reduction undertaken in FY 2016-17. In the ROI, interest incurred in relation to the said loan has been claimed as a deduction under section 36(1)(iii) of the Act (after giving effect of interest required to be capitalised as per ICDS IX) and all the three conditions as per the provisions of section 36(1)(iii) of the Income Tax Act, 1961 are fulfilled.

35. In regard to this issue what we find material is that the purpose of the additional loan was securitisation of present or future lease rentals receivable from the occupants. To secure the term loan, the entire cash flow from the lease rentals collected from the occupants was to be deposited in the designated account maintained with the bank to ensure the repayment of the term loan. The additional Term Loan taken by the Assessee was nothing other than a discounting of future receivables, whereby the bank paid a portion of the future receivables upfront and collected those receivables as and when they became due. In substance, the interest was a discount payable for the accelerated realisation of future receivables. Thus it is not a simple case of borrowing for acquiring any interest in an asset but it appears to be a well designed and calculated business restructuring of share capital and the prospective revenues to bring some methodical shift in the income generation and profit distribution. The capital reduction of equity shares was done on grounds of commercial expediency, and the loan could be said to have been taken in order indirectly to carry on of the business of the Assessee. The borrowing of a loan and actual application thereof are two separate transactions. The transaction of borrowing is not the same as the transaction of investment, which could be either revenue or capital. The borrowing here is for giving effect to the rationalization of its capital structure undertaken out of scheme of capital reduction approved by the Hon’ble High Court and certainly falls in the scope of “for the purpose of business” and “on the grounds of commercial expediency”.

36. It is a well settled principle that the expression “for the purpose of the business” is of a very wide import. The Hon’ble Supreme Court in the case of CIT v. Malayalam Plantations Ltd. [1964] 53 ITR 140 (SC) held that:

……………………… The expression “for the purpose of the business” is wider in scope than the expression “for the purpose of earning profits”. Its range is wide: it may take in not only the day to day running of a business but also the rationalization of its administration and modernization of its machinery; it may include measures for the preservation of the business and for the protection of its assets and property from expropriation, coercive process or assertion of hostile title; it may also comprehend payment of statutory dues and taxes imposed as a precondition to commence or for carrying on of a business; it may comprehend many other acts incidental to the carrying on of a business……………….”

37. The Hon’ble Supreme Court in case of S.A. Builders Ltd. v. CIT (Appeals)  288 ITR 1 (SC) has held that expenditure incurred voluntarily for on the grounds of commercial expediency should qualify as having been incurred for the purpose of business or profession. The term ‘commercial expediency’ is an expression of wide import and includes such expenditure as a prudent businessman incurs for the purpose of business. The expenditure may not have been incurred under any legal obligation, yet it is allowable as business expenditure if it is incurred on grounds of commercial expediency.

38. We are of considered view that the contention of ld. Counsel of assessee is correct that here commercial expediency is to be understood from perspective of assessee which decided replacing share capital with borrowed money if borrowed money was available on lower cost. Therefore, a capital reduction exercise, by employing borrowed capital available at lower cost, could be undertaken to streamline the capital structure of the company, reduce cost of capital and improve shareholder returns. All of the aforesaid should be covered under the expression “for the purpose of business” given its wide meaning by judicial pronouncements.

39. Further, ld. CIT(A) has disallowed the claim of the Assessee stating that borrowed funds has been used for capital purpose which has enduring benefit to the business of the Assessee. In this regard we are of considered view that interest expenditure incurred for carrying out capital reduction in any manner did not enhance the capital structure of the Assessee or provided any enduring benefit and thus is revenue in nature and not capital in nature. Reliance in this regard is rightly placed by ld. Counsel on the decision of the Mumbai Tribunal in the case of Colgate-Palmolive (India) Ltd. v. Addl. CIT   (Mumbai – Trib.) wherein the Tribunal held that expenditure incurred for implementing the capital reduction scheme is revenue in nature as the Assessee has neither acquired any benefit of enduring nature nor has such expenditure resulted into any asset. The relevant extract of the judgement has been reproduced below for conclusive reference –

“12. We have heard the rival submissions and perused the relevant materials on record. The reasons for our decisions are given below.

10. It is clear from the aforesaid judgments that a fine distinction is made by the Supreme Court in classifying the expenditure under two categories:-

(a) When the expense incurred relates to the issue of fresh shares, which leads to an inflow of fresh funds into the company, such expenditure is to be treated as capital expenditure.

(b) On the other hand, where no such flow of funds or increase in the capital. employed, the expenditure incurred would be revenue expenditure, as in such a case the company would not acquire benefit or addition of enduring nature.

In the instant case, as recorded by the AO, the assessee incurred Rs. 1,86,38,936/- comprising mainly of professional charges, legal charges, postage, printing etc. Herein there is a reduction of share capital which has resulted in decrease in fund. The appellant has neither acquired any benefit of enduring nature nor has such expenditure resulted into any asset. We are of the considered view that the ratio laid down in Selan Exploration Technology Ltd. (supra) by the Hon’ble Delhi High Court after considering the decision in Brooke Bond India Ltd. (supra) squarely applies to the present case. Following the same, we delete the disallowance of Rs. 1,86,38,936/-made by the AO and allow the and ground of appeal.

(emphasis supplied)

40. Accordingly, we are of considered view that the impugned disallowance of interest on capital borrowed and utilised for capital reduction cannot be sustained and is liable to be deleted. The corresponding ground is allowed.

41. Ground 12 :- The ground arises out of disallowance of interest on Compulsorily Convertible Debentures (CCDs) to BREP India Office Holdings IV Pte Ltd (BREP IV). The Assessee had issued CDs BREP IV in the FY 2014-15 which is a foreign company, incorporated and registered in Singapore and had claimed interest incurred on such CDs as a deductible expense under section 36(1)(iii) of the Act. The AO in course of assessment proceeding for AY 2015-16, had added the amount received by the Assessee pursuant to the subscription of the CCDs to its income as an unexplained cash credit within the meaning of section 68 of the Act. Considering, the additions made under section 68 in AY 2015-16 in relation to CCDs, the Ld. AO in the course of assessment proceedings of AY 2017-18, asked the Assessee to justify deduction of expenses amounting to INR 8,16,28,764 pertaining to interest paid towards CCDs to BSREP IV. In this regard, the Assessee had vide its detailed reply dated December 23, 2019 (available at Page No. 72-82 of Paperbook and December 24, 2019 (Page No. 85-89 of Paperbook) submitted that the Assessee has not accepted the disallowance of CDs as unexplained cash credit and appeal has been filed against the assessment order dated October 28, 2019 for AY 2015-16 before this Tribunal.

41.1 We find that vide Seaview Developers (P.) Ltd. v. Asstt. CIT [IT Appeal No. 9237 (Del) of 2019, dated 30-1-2026] this appeal of the assesse for AY; 2015-16 has been decided by the Coordinate Bench on 30.01.2026 wherein the appeal was allowed on the basis that the assessment order was barred by limitation thereby the assessment order was quashed. So actually there is no conclusive findings about genuineness of transaction and thereby giving this bench opportunity to consider the genuineness of the transaction too.

42. Now admittedly, during the course of assessment proceedings for AY 2017-18, the Assessee had submitted all possible and available documentary evidence for proving identity, creditworthiness and genuineness of the transaction of subscription of CCDs by BREP IV. However, the Ld. AO disregarded the above submissions and placed reliance on the judgement of Hon’ble Punjab & Haryana High Court in the case of Smt. Shanta Devi v. CIT  171 ITR 532 (Punjab & Haryana) and interpreted the term ‘books of the assessee’ appearing in section 68 of the Act to conclude that the ‘books of the assessee’ pertains to that of resident in the present case, thus the provision of section 68 of the Act were rightly invoked in the case of Assessee in AY 2015-16. Accordingly, for AY 2017-18 the Ld. AO disallowed the interest expenses amounting to INR 8,16,28,764 on such CCDs issued to BSREP IV.

43. Before the CIT(A), the Assessee re-submitted the documentary evidence and without prejudice basis, technical submissions were also made based on judicial precedents that proviso to Section 68 is not applicable to loan / debt transactions and source of source cannot be enquired in case of non-resident shareholders. However, the ld. CIT(A) upheld the disallowance of interest incurred on CCDs on grounds that as per circular No. 74 dated 08/06/2007 issued by the RBI, CDs are part of equity/capital and not an instrument for borrowing and hence the payments related to CCDs is in the nature of either dividend or premium and not in the nature of interest, but in nature of capital expenditure.

44. In this regard we find are of view that the two tax authorities below, the ld. AO and the ld. CIT(A) have some how taken different tangents to make disallowance. Ld. AO has considered it to be mere interest expenditure on loan already disallowed in AY 2015-16 and ld. CIT(A) has considered it as payments made as benefits to the share holder.

45. Now, admittedly BREP IV is registered as a foreign portfolio investor with the Securities and Exchange Board of India and in itself is prima facie evidence of the creditworthiness and genuineness of the transaction. Further, at page 210 to 347 of the Paper Book, the vital evidences filed before the ld. Tax authorities are also filed here, and for completeness we mention the same here below:

46. These evidences have not been rebutted by ld. AO by pointing out anything to show that same do not form part of a genuine transaction of investment in Assessee. Further, by providing the electronic receipt of fund issued by Standard Chartered Bank and a board resolution of allotment of CCDs has established the genuineness of the funds received by the Assessee as well.

47. Further more, according to section 68 of the Act, any sum received by an assessee and recorded in the books of accounts during the previous year could be added to the income of such assessee, if such assessee fails to provide explanation for the nature and source of the sum received. Post insertion of first proviso to section 68 of the Act by the Finance Act, 2012, it is now amply clear that the source of source of funds can be enquired by the assessing officer only in the case of a company who receives such sums from a resident and on issuance of equity shares capital, share application money, share premium etc. Thus, investor being foreign company, investing by way of CCD, the source of source was not required to be established by the assessee. Reliance is placed on decision in case of ACIT v. Smt. Prem Anand [IT Appeal No. 3514 (Delhi) of 2014, dated 13-4-2017] and DCIT v. Aarti Catalyst Solutions (P.) Ltd. [IT Appeal No. 1195 (Ahd) of 2018, dated 16-2-2022] [ITAT – Ahmedabad] wherein it has been held that the proviso to section 68 is not applicable to loan transactions i.e. source of source cannot be enquired in case of loan transactions.

48. Even otherwise, the sums were received by the Assessee on account of issuance of debentures for availing unsecured loans and not on account of issuance of shares. In case of CDs, CCDs continue to represent debt till conversion thereof into shares. Reliance is this regard is further placed on the judgement of co-ordinate bench in the case of Religare Finvest Ltd. v. DCIT [IT Appeal No. 5202 (Delhi) of 2017, dated 13-7-2023] (Delhi – ITAT). In Amplus Energy Solutions Pte Ltd. v. ACIT, Circle international tax 1(1)(1)   (Delhi – Trib.)/ITA No.2417/Del/2023 dated 25 June 2025 a coordinate bench has held that OCD or CCD are different from shares and the bench held as under:

11. Further, the issue as to the nature of OCDs / CDs, viz, whether the same are in the nature of debt or equity, is no longer res-integra. In the case of R.D. Goyal v. Reliance Industries Ltd.: 113 Comp. Cas. 1/ 40 SCL 503, the Hon’ble Supreme Court of India, after detailed analysis of the difference between debenture and shares, noted that the expression “share” has been defined in section 2(46) of the Companies Act, 1956 to mean share in the share capital of a company, while debenture is simply an instrument of debt executed by the company acknowledging its liability to repay the amount represented therein at a specified rate of interest; in other words, debenture is a certificate of loan or bond evidencing the fact that the company is liable to pay an amount specified with interest. Though the amount which is raised by a company through debentures becomes part of its capital structure, the same does not become part of share capital, the apex Court further observed.

12. Further, reliance is placed on the following case laws to contend that the Hon’ble Courts and benches of the Tribunal have recognized the difference between CCDs / OCDs, on the one hand, and shares, on the other, to hold that expenses incurred on issuance of CCDs / OCDs being debt instruments, which is different from shares, is allowable deduction under the provisions of the Act.

49. Thus, the reasons for disallowance by the Ld. CIT(A) deserves to be negated at the very threshold. Thus the impugned disallowance of interest incurred on CCDs deserves to be deleted. The corresponding grounds are sustained.

50. The remaining grounds of appeal of assessee are rendered academic and need no separate adjudication. Thus the appeal of assessee is allowed and impugned disallowances and additions are deleted.

51. Ground 1; The ground arises out of disallowance of property management fee amounting to INR 19,70,03,457, deleted by the ld. CIT(A). Ld. DR has though relied the findings of ld. AO we find that during the year under consideration, the Assessee had incurred property management fees of INR 9,70,03,457 to the Candor India Office Parks Private Limited (‘CIOPPL) and the same was claimed as an expense while filing the ROI. The Ld. AO, in the course of assessment proceedings, asked the Assessee to provide the party-wise details of Property management fees along-with the nature of work provided. In this regard, the Assessee submitted the party-wise details along-with the nature of services provided alongwith the copy of agreements were also placed on record before the Ld. AO. However, the Ld. AO has disallowed the property management fees of INR 19,70,03,457 as fees paid to Candor India Office Parks Private Limited (CIOPPL) on the premise that CIOPPL is a related party and that similar services are also being rendered by other service providers like Jones Lang Lasaale Building Operations Private Limited (JLL). Ld. Counsel has also pointed out that the Ld. AO inadvertently disallowed INR 19,70,03,457 instead of INR 9,70,03,457. During the proceedings before ld. CIT(A), same was deleted by following findings: –

“In the assessment order that AO has observed that “It appears that the bogus expense was booked by the assessee company on account of Property Maintenance to M/s Candor India Office Parks Put Ltd. The maintenance cost is also comparatively higher than that of the M/s Jones Lang Lasalle Building Operations Put Ltd” and “in the absence of any corroborative material to prove the services has been rendered” while disallowing the expenditure on property maintenance expenditure to M/s Candor India Office Parks Put Ltd. There seems to be a mere assumption by the Assessing Officer in comparison to the payments done to another party by the appellant. However here also the AO qualifies that the services rendered to the appellant are of different nature in between the parties. The materials furnished by the appellant during the remand proceedings had not been controverted or no evidence has been brought by the AO for rendering the same service the appellant has paid to different amounts at varying rates out of which one is a related party. Moreover, it is not the case of the AO to prove that payments had gone to the related party without rendering any services. It is also to be considered that the entire receipts at the hands of the service provider has been offered to tax as taxable income while the appellant has the eligibility for claiming deduction under section 80IAB. Considering the facts and circumstances and no fault was detected by the department on the hands of the service provider about the services rendered to the appellant, Hence, I have no hesitation to delete the addition made by the AO in this count. This ground is allowed.”

52. Now ld. Counsel has demonstrated before us that services provided by the CIOPPL and JLL are completely different / distinctly identifiable and hence not comparable. It also comes up that CIOPPL is not a related party within the meaning of section 40A(2)(b) of the Act. Ld. Counsel has also demonstrated that property management fees paid by the Assessee have been duly included in the income and has been offered to tax in the ROI by CIOPPL. Last and not the least the Assessee was justified in making payment of property management fees on grounds of commercial expediency and direct nexus with business operations of the Assessee. Thus findings of ld. CIT(A) need no interference and the ground is rejected.

53. Ground 2; The ground arises out of disallowance on account of advance to customers which is deleted by the ld. CIT(A). During the assessment proceedings, the Ld. AO had asked the Assessee to furnish the details of TDS deducted by various parties on advance rent appearing in the balance sheet. In response to the above, the Assessee submitted that receipts amounting to INR 16,07,66,736 were not advances received from tenants against the future lease rent receivable but were excess Common Area Maintenance (‘CAM) charges collected and recorded under the head ‘other current liabilities’ as advanced received from customer. In support of this, a copy of list of credit notes issued to the tenants in respect of such excess CAM recovered was also submitted by the Assessee to Ld. AO. Further, during the proceedings before ld. CIT(A), the Assessee had furnished the sample tenant agreement (Page No. 428-446 of Paperbook), sample invoices (Page No. 467-471 of Paperbook) and sample credit notes (Page No. 447471 of Paperbook) as additional evidence to explain excess collection of CAM and that the Assessee was contractually obligated to repay tenants for which credit notes were also issued to tenants. The ld. CIT(A) had forwarded the same for verification by Ld. AO and asked Ld. AO to prepare remand report. However, the Ld. AO did not provide any comments on the same. The Ld. CIT(A), on perusal of documents and explanations provided by the Assessee, deleted the additions made. The relevant findings at page 74 -75 of CIT(A), are reproduced below;

“My Decision: In the assessment order that AO has observed that “It appears that the bogus expense was booked by the assessee company on account of Property Maintenance to M/s Candor India Office Parks Pvt. Ltd. The maintenance cost is also comparatively higher than that of the M/s Jones Lang Lasalle Building Operations Pvt. Ltd” and “in the absence of any corroborative material to prove the services has been rendered” while disallowing the expenditure on property maintenance expenditure to M/s Candor India Office Parks Pvt. Ltd. There seems to be a mere assumption by the Assessing Officer in comparison to the payments done to another party by the appellant. However here also the AO qualifies that the services rendered to the appellant are of different nature in between the parties. The materials furnished by the appellant during the remand proceedings had not been controverted or no evidence has been brought by the AO for rendering the same service the appellant has paid to different amounts at varying rates out of which one is a related party. Moreover, it is not the case of the AO to prove that payments had gone to the related party without rendering any services. It is also to be considered that the entire receipts at the hands of the service provider has been offered to tax as taxable income while the appellant has the eligibility for claiming deduction under section 80IAB. Considering the facts and circumstances and no fault was detected by the department on the hands of the service provider about the services rendered to the appellant, Hence, I have no hesitation to delete the addition made by the AO in this count. This ground is allowed.”

54. In this regard, though ld. DR has relied the findings of ld. AO we find that it is usual in real estate industry that CAM is recovered or billed on the basis of last year’s audited CAM rate (‘Estimated CAM rate’). Later, the actual expense incurred during the year is consolidated and “Actual CAM rate” is determined through CAM Audit. CAM rate so determined is then shared with tenants informing them about resultant CAM recovery (in case rate determined is more than the billed rate) or credit note is issued (in case rate determined is less than the billed rate). Thus, based on Actual CAM rate there may be an excess or short recovery as against Estimated CAM rate. In this regard, extract of CAM agreement between the Assessee and one of its tenant M/s Mercer Consulting (India) Private Limited is reproduced below and the said agreement is filed at Page 428 to 446 of the Paper Book.

“8.1 Audit

At the end of each financial year, SDL shall get its Projects Accounts audited and the expenses incurred would form basis of the estimates for generating invoices in the subsequent financial year. In case, there is any deficit, the same shall be recovered in the subsequent invoice and in case of excess the same shall be adjusted in subsequent invoices. If the Agreement has been terminated, such excess shall be paid back to the Occupant subsequently after audit, subject to payment of all other outstanding dues by the Occupant under this Agreement. The Project Accounts of the Maintenance Agency shall be audited by any of the Big Four Auditors (Delloite, KMG, E&Y, PWC).”

55. Thus, ‘advance from customer’ of INR 16,07,66,736 in financial statements relates to excess Common Area Maintenance recovered from tenants. Thus, assesee had clarified that amounts in ‘advance from customers account’ pertains to excess collection of CAM which the Assessee was contractually obligated to repay the tenants (by way of issue of credit notes) post finalization of CAM rate through CAM audit. Since Assessee has already issued credit notes of INR 16,07,66,736 in FY 2017-18, hence the amount which are transferred to ‘advance from customers account’ in FY 2016-17 should not be added to the income of the Assessee. The findings of ld. CIT(A) need no interference and ground is rejected. Accordingly, the appeal of the department deserves to be dismissed.

56. Consequently, the appeal of assesse is allowed and of the department is dismissed.