THE issues before the Bench are - Whether in FCCB issue, it is required to disclose the details of those subscribers other than the lead suscriber, even though they have no privity of contract under the subscription agreement and Whether in FCCB issue, disclosing identity of the person, who has the sole responsibility of subscribing the issue, is sufficient disclosure warranted u/s 68. And the verdict goes in favour of the assessee.
Facts of the case
The assessee M/s Reliance Communications Ltd raised funds through three issues of FCCBs and the proceeds were received in Deutsche Bank, Singapore (DB) of USD 500 million; and JP Morgan New York and Hong Kong and Shanghai Banking Corporation of USD 1000 million. These FCCBs were subscribed to by the Lead Managers namely, Deutsche Bank Hong Kong (DB HK); JP Morgan Securities Ltd. U.K. and Hong Kong and Shanghai Banking Corporation. The assessee
submitted all the details of the subscribers to the FCCB issue. The details of the bank in which the proceeds of FCCBs were parked in the foreign countries and from where these were transferred to Indian Bank, were also furnished. Along with the said reply, the assessee submitted copies of Offer Memorandum of the FCCBs issued, Global Certificate along with the Registrar’s confirmation of entries of the Bondholder in Register, Foreign Inward Remittance Certificate and the details of FCCBs as per the Offer documents and Global Certificates.
As per the agreement between the assessee and DB HK, it was the obligation of DB HK to pay towards FCCB issue and on conversion of FCCB at a much later stage, that DB HK itself opted to subscribe for a certain part of the FCCB and issued a portion thereof to other customers who were international financial institutions. The CIT was of the opinion that the AO should have examined the identity, capacity and creditworthiness of the 'actual subscribers’ i.e. these financial institutions, to the FCCB issue in terms of Section 68. CIT held in his order that the actual subscribers were distinct from the Lead Manager, and failing to provide details of these suscribers, the onus of disclosure required u/s 68 was not discharged by the assessee. Since, these details were not asked for by the AO in his assessment order, the CIT was of the opinion that the order was erroneous and prejudicial to the interests of the Revenue and warrants revision u/s 263.
Aggrieved, the assessee filed this appeal.
The Departmental Representative argued that the actual subscribers were distinct from DB HK and their details were required to be disclosed by the assessee, and thus the onus of disclosure u/s 68 has not been discharged by the assessee. Additionally, the DR also raised a new ground to support the order of the CIT and relied upon a Circular issued by the Reserve Bank of India and argued that the assessee has failed to examine the factum of the compliance or otherwise of the RBI Guidelines in connection with its FCCB issue.
Having heard the parties, the Tribunal held that,
++ section 68 of the Act clearly provides that where any sum is found credited in the books of an assessee maintained for any previous year, and the assessee offers no explanation about the nature and source thereof or the explanation offered by him is not, in the opinion of the Assessing Officer, satisfactory, the sum so credited may be charged to income-tax as the income of the assessee of that previous year. A bare perusal of this provision divulges that there is an obligation on the assessee to prove the identity, capacity and credit worthiness of the person from whom the money is actually received. At the cost of repetition, we summarize the entire proceedings in respect of FCCB of USD 500 million which was undertaken to be subscribed to by DB HK. A GC for the whole issue was issued in favour of the nominee of DB HK, who could have either subscribed to all the Bonds itself or solicited customers. It was the sole discretion/obligation of the DB HK to find such customers, if it wanted. Admittedly, DB HK subscribed to/collected the sum in respect of USD 500 million and after deduction of their commission, remitted the balance USD 497,500,000 to the assesse;
++ it is palpable from the above narration of facts that the assessee was concerned with and did actually receive USD 497.500 million from and on behalf of DB HK, which was duly recorded in its name. It is not understandable, in the facts and circumstances of the extant case, that how the assessee could have entered the names and addresses of the actual subscribers in its books of account, when the subscriber, as far as the assessee is concerned, was DB HK. The Global Certificate was issued by the assessee in the name of DB HK. It was for DB HK to subscribe to the entire FCCB or find customers for a part or total of such issue. The decision on inviting other customers from outside India to subscribe to the FCCB and to what extent was the sole responsibility of DB HK, without any instructions or involvement of the assessee in India. In so far as the assessee is concerned, it was only supposed to get the amount against FCCB from DB HK, which it, in fact, received. The fact that Global Certificate was issued in the name of nominee of DB HK amply proves that it was the obligation of DB HK to pay towards FCCB issue of USD 500 million. The CIT has not referred to any material which indicates that the assessee had details of the 'actual subscribers’ at the time of issuance of FCCB or it was obliged to keep such details. No material has been brought to our notice even by the DR to show that at that stage the assessee had any direct contact with the actual subscribers to the FCCB, different from DB HK. It can be observed from the details of the shares issued, on conversion of FCCB at a much later stage, that DB HK itself opted to subscribe for a certain part of the FCCB and issued a portion thereof to other customers who also happen to be international financial institutions only;
++ at the stage of issuance of Bonds, there was privity of contract between the assessee and DB HK on one hand and between DB HK and actual subscribers on the other. It was the duty of DB HK to eventually get the shares allotted or refund granted to itself and other international financial institutions at the relevant point of time. It was only at the stage of issuance of shares or the granting of refund, that the assessee was to do the needful upon intimation by DB HK about the persons who had purchased separate interest (shares) in the GC. It is a matter of record that the assessee issued shares on conversion to certain parties, such as, JP Morgan Securities Ltd., The Hong Kong and Shanghai Banking Corporation Limited and DB HK itself in next year on various dates from 18.10.2007 to 31.1.2008. Only on the issuance of shares, these international financial institutions could be said to have come into direct contact with the assessee company. At the stage of issuance of Bonds in the previous year relevant to the assessment year under consideration, such customers of DB HK were not entitled to directly approach the assessee company in respect of any matter concerning the issuance of Bonds. When such is the situation, we fail to appreciate as to how the assessee could record the names of actual subscribers other than DB HK in its books of account and further prove their identity, capacity and credit worthiness. On a specific query from the bench, the Departmental Representative could not bring to our notice any statutory requirement or guideline issued by the RBI or any other Government authority fastening obligation on the assessee to maintain a record of the actual subscribers at that stage and recording their names instead of DB HK, who actually signed subscription agreement with the assessee. During the curency of the GC, only DB HK remained the subscriber to the FCCB issue of the assessee. The assessee was only required to prove the identity, capacity and creditworthiness of DB HK who subscribed to its full issue of FCCB (some part directly and some part through its own customers), which is not in doubt. The fact that the assessee received the amount of subscription of Bonds from DB HK has not been denied by CIT. The further fact that Global certificate in respect of Bonds was issued in favour of DB HK and upon conversion of such Bonds, some of the shares were issued in favour of DB HK and remaining in favour of other international financial institutions has also not been disputed by the CIT. In our considered opinion, the assessee adequately discharged the onus cast upon it in terms of section 68. The probe suggested by the CIT could have been possible in the assessment of DB HK, who eventually partly subscribed to the Bonds itself and partly issued these to the international financial institutions. In view of these facts, we are of the considered opinion that CIT was not justified in putting obligation on the assessee to prove the identity, capacity and creditworthiness of the actual subscribers, which fact was beyond its reach at the relevant time. We, therefore, do not approve the stand taken by CIT on this issue;
++ now the question arises as to whether the DR can be held to be within her power to press for approving the impugned order from an angle different from that taken note of by the CIT. The Punjab and Haryana High Court in the case of CIT v. Jagadhri Electric Supply and Industrial Co. has held that the jurisdiction vesting in the CIT u/s 263(1) is of a special and exclusive nature. At the time of hearing of the appeal against CIT’s order u/s 263(1), if the assessee can satisfy the tribunal that the grounds for decision given in the order by the CIT are wrong on facts or are not tenable in law, the Tribunal has no option, but to accept the appeal and to set aside the order of the CIT. The Tribunal cannot uphold the order of the CIT on any other ground which, in its opinion, was available to the CIT as well but was not relied upon by CIT in his order. It further held that if the tribunal is allowed to find out the grounds available to the CIT to pass an order u/s 263(1), then it will amount to sharing of the exclusive jurisdiction vesting in the CIT, which is not warranted under the Act. The nutshell of this judgment is that the tribunal in an appeal against revision order cannot substitute the grounds which the Commissioner did not find proper to form the basis of his order. This judgment has been followed by the Kerala High Court in the case of CIT v. Chandrika Educational Trust. In view of the foregoing precedents it is abundantly clear that the Tribunal can vet only the reasons recorded by the CIT for determining as to whether the order u/s 263 is sustainable or not;
++ it is out of place for the DR to rely on the RBI guidelines in the present proceedings for bringing home the point that the A.O. did not examine the aspect of compliance of such guidelines. It has been noticed above that the CIT did not touch this aspect in the impugned order. In that view of the matter, if the DR is allowed to supplement the reasons for revision, it would amount to usurping the jurisdiction of the CIT u/s 263, which obviously is impermissible. The conclusion drawn by the CIT as to whether the assessment order was erroneous and prejudicial to the interests of the revenue can be examined and decided only on the touchstone of the reasons given by him alone. No arguing or adjudicating authority can put forth or consider any reason other than that adopted by the CIT for testing the sustainability or otherwise of the order u/s 263.
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