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The Income Tax Appellate Tribunal (ITAT) has upheld the ruling of the Income Tax Department against NDTV promoters Prannoy Roy and Radhika Roy on the issue of tax evasion with respect to certain transactions in the securities market.
The order was passed by a Bench comprising Judicial Member Beena A Pillai and Accountant Member Prashant Maharishi.
The assessee, Radhika Roy, had filed a return of income on July 31, 2010 declaring a. total income of Rs. 90,80,683. The return was revised on March 16, 2011 stating the same taxable income, but claiming carry forward of long-term capital loss of RS. 3,54,000,000, which was not claimed in the original return of income.
After detailed information regarding incorrect disclosure of capital gains was received from the Deputy Director of Income Tax (Investigation), the case of the assessee was selected for scrutiny and necessary notices under Section 143 (2) were issued on July 27, 2011.
During the course of assessment proceedings, the Assessing Officer (AO) found that Radhika Roy had sold 5,781,841 equity shares of NDTV on August 3, 2009 at a rate of Rs. 4 per share to RRPR Holdings at a discounted rate. The assessee had sold further shares on March 9, 2010 at the rate of RS. 140 per share. A query was raised by the Department regarding the same.
Roy submitted that the promoter group of NDTV consists of Prannoy Roy, herself, and RRPR. RRPR has only two shareholders holding equal shares – Prannoy Roy and the assessee, Radhika Roy.
It was stated that in the above transactions, no laws, whether taxation or corporate, have been violated or intended to be violated. This was a transaction solely within the promoter group and the promoters could not have benefited from the transaction strictly between themselves. With respect to the price of Rs. 140 per share of NDTV, it was explained that sale of shares to RRPR on March 9, 2010 was done at the market rate.
The AO noted that each person is assessed separately be it husband, wife or the promoter company, and therefore, even the transactions between the promoter group inter se would be covered.
Therefore, he rejected the argument of Radhika Roy and proceeded to analyze the transactions involving the sale of shares.
He noted that the assessee had sold 5,781,842 equity shares of NDTV at Rs. 4 per share to RRPR, whereas on the same day, at the Bombay Stock Exchange, NDTV shares were traded within the range of RS. 134.95 to Rs. 141.50 Per share. Therefore, he took the lowest price of Rs. 135 as the sale price of the above share as consideration received and accrued to compute long-term capital gain.
Accordingly, for computation of capital gain, the AO took the sale consideration at Rs. 78,05,48,535. On computation of capital gain, the AO made a net addition of Rs. 67,22,31,387 to the income of the assessee on account of capital gain. This net addition was subsequently modified to Rs. 55,88,73,564 by the AO.
It was also noted that the assessee has purchased 34,78,925 shares of NDTV Limited from RRPR on March 9, 2010 at Rs. 4 per share when the market rate of such shares was Rs. 140 per share.
On March 9, 2010 the market value of the share of NDTV limited on the stock exchange was in the range of Rs. 129.95 to Rs. 134.70 per share and assessee has sold shares to RRPR on the same day at Rs. 140 per shares.
Therefore, the AO noted that these transactions have been carried out to manipulate the gain or loss of long-term capital gain by the assessee. The AO applied the observation of the Supreme Court in the case of McDowell and Co Ltd v. Commercial Tax Officer.
Accordingly, he noted that the transactions shown by the assessee as long-term capital gains are nothing but sham transactions which have been manipulated to evade tax arising out of the transfer of shares of NDTV.
He further noted that Radhika Roy is a director of NDTV, and holding a substantial stake in the company, is in a position to influence the decision of that company. Therefore, the actual nature of the transaction has to be examined by lifting the corporate veil, which would reveal that the assessee and NDTV are not distinct entities and that both acted in connivance to evade the tax on capital gains.
Accordingly, he made an addition of Rs. 47,31,33,800 at the rate of Rs. 136 per share which was the difference between the quoted prices of Rs. 140 per share and the cost shown of Rs. 4 per share on 3,478,925 shares.
The assessee challenged both the first and second issues same before the Commissioner of Income Tax (CIT).
Appeal before CIT
On the first issue of considering the ‘full value of consideration accrued or received’ by the assessee for 5,781,841 shares transferred on August 3, 2009 at Rs. 4 per share, the CIT-A ruled in favour of the assessee. This was challenged by the AO before ITAT.
With respect to the second issue of sale of 3,478,925 shares by RRPR to the assessee at Rs. 4 per share on March 9, 2010, the issue of the addition of Rs. 47,31,33,800 made by the AO as alleged unexplained investment was upheld by the CIT as chargeable to tax under section 56(2)(vii)(c) of the Income Tax Act. Roy challenged the same before the ITAT.
ITAT on first issue
It was the argument of the Department that Prannoy Roy and Radhika Roy have substituted their quantities of share in the name of RRPR Holding, a controlled and managed company, at Rs. 4 when the quoted prices of those shares on the stock exchange was Rs. 140 per share.
Further, against those substituted shares, huge borrowings were made by that company, substituted shares were pledged, call option agreements were entered into, and a loan was used without payment of any interest. Thus, it resulted in the transfer of shares by the assessee through an intermediary, receiving of the loan consideration in a controlled company, and using the same money.
This clearly showed that that the shares of NDTV were transferred by the assessee in favour of a third-party lender group, in the guise of loan, pledge and call option agreement, the IT Department submitted.
These loan agreements were with Vishvapradhan Commercial Pvt Ltd (VCPL) and ICICI Bank.
The Department submitted that the loss was overstated, and the profit was understated by manipulation of the prices of shares of NDTV for purchase and sales of shares with RRPR.
It was also submitted that the transaction dated August 3, 2009 is pursuant to an agreement dated July 21, 2009 with Vishvapradhan Commercial Private Limited. On July 21, 2009, one of the agreements was entered which was a supplementary agreement with Subhagami Trading Private Limited.
Further, Subhgami Trading and VCPL are having their offices in the same premises, and that the signatories of both the companies are also the same person.
It was therefore argued that it was a case of substitution of fair market value with the consideration received by the assessee. It was submitted by the Department that through the complex structure of various agreements, the actual consideration received or accruing to the assessee is linked to the listed price of the shares of NDTV.
Therefore, it was the case of the Department that the CIT–A did not look into the real nature and substance of the transaction, but simply accepted the written submissions and arguments of the assessee and deleted the addition of Rs. 55,88,73,564 which was made by the AO.
ITAT held that shares were transferred to RRPR with the sole purpose of obtaining a loan without payment of interest equivalent to the market value of the shares of NDTV. The order states,
“Thus, it is apparent that on transfer of the shares to the RRPR Holdings Limited and further pledge of the shares, benefit accrues to the assessee in terms of interest free funds based on market value of the shares of the NDTV limited. No doubt, there is no stipulation of prices at the time of transfer of shares from assessee to RRPR Holdings Pvt Ltd but the equivalent amount of loan based on Market value of the shares is available to the assessee.”
Here, the issue was not the reinstatement of actual consideration by fair market value of the shares of NDTV, but actual consideration received by the assessee through RRPR. The CIT failed to read any of the agreements based on which the whole transaction was structured, the ITAT held.
The only purpose of transfer of the shares to that company was to obtain a loan by pledging those shares considering the fair market value of the shares of NDTV, which is the listed price of that company, the ITAT made it clear.
Therefore, if the shares are transferred at Rs. 4 per share, the assessee will pay capital gain tax only considering the sale value of those shares (if the whole transaction is not looked in to by complex agreement of loans), whereas RRPR will obtain loan on those shares at the listed price of the shares of NDTV limited, free of interest.
In a way, it devised to pledge the shares of promoters to obtain interest-free loan for an indefinite tenure coupled with call option agreements to transfer the shares of NDTV.This shows a clear-cut benefit resulting into the hands of the assessee and Prannoy Roy, ruled ITAT.
In view of the above finding, the ITAT reversed the finding of the CIT–A and held that the full value of the consideration that accrued to the assessee on the sale of the shares of NDTV to RRPR has resulted in understatement of capital gain to the extent of Rs. 55,88,73,564.
ITAT on Second Issue
Regarding the second issue of sale of shares by RRPR to Radhika Roy at Rs. 4 per share on March 9, the ITAT held that there is no infirmity in invoking the provision of Section 56(2)(vii)(c) of the Act by the CIT (A).
“The asset that has been transferred in this transaction in shares, which is covered under the definition of property as per clause (d) of the second proviso to the above section. Further fair market value of such transaction is also required to be determined under section 11 UA of the income tax rules according to which the fair market value in respect of a court in shares are the quoted price on the recognized stock exchange.
Therefore the impugned transaction satisfied all the ingredients of the provisions of section 56 (2) (Vii) of the act. Therefore we do not find any infirmity in the order of the learned CIT – A in invoking that provision with respect to the about transaction.”
The ITAT turned down the submission of the assessee that as it is a transaction between closely related parties and there is no motive of the tax evasion, Section 56 (2) does not apply.
“The argument deserves to be rejected at the threshold itself as the assessee has failed to explain by credible evidence any reason of buying the shares of the above company at Rs. 4/- per share when the quoted price of the share on the recognized stock exchange is INR 140/– per share. As the motive itself of the assessee was not demonstrated at all with credible evidences the assessee now cannot say that there was no motive of tax evasion.”
Therefore, the appeal was turned down on this aspect.