The Delhi bench of Income Tax Appellate Tribunal (ITAT) has upheld addition of long term capital gains (LTCG) tax against Dr Prannoy Roy and his wife Radhika, both promoters of New Delhi Television Ltd (NDTV) for realising share sale consideration in the guise of loan. The case was related with purchase and sale of shares of NDTV in August 2009 by RRPR Holding Pvt Ltd and the Roys and concealment of income of over Rs117 crore each during two assessment years.
In an order passed on 14 June 2019, the ITAT bench of Beena Pillai and Prashant Maharishi says,
"The authorised representative (of the Roys) has stated that as it is a transaction between the closely related parties and there is no motive of the tax evasion is the provisions of section 56 (2) does not apply. Here 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 (NDTV) at Rs4 per share when the quoted price of the share on the recognised stock exchange is Rs140 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."
During August 2009, the Roys sold their shares in NDTV to RRPR Holding at Rs4 per share against its market price of Rs140 at that time. Then on 9 March 2010, the Roys bought 34.79 lakh shares of NDTC from RRPR Holding at Rs4 per share against the market price of Rs140 per share. The AO O noted that these transactions have been carried out to manipulate the gain or loss of long-term capital gain by the assessee.
"Accordingly he (the AO) noted that the transaction shown by the assessee has long-term capital gain are nothing but sham transactions which have been manipulated to evade tax arising on the transfer of shares of NDTV. He further noted that assessee is a director of NDTV and holding a substantial stake and is in a position that can 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 as far as this camouflages concerned and that both acted in connivance to evade the tax on capital gains. Accordingly, he made an addition of Rs47.31 crore at the rate of Rs136 per share being difference between the quoted prices of Rs140 per share and the cost shown of Rs4 per share on 34.79 lakh shares of the above company," the order from ITAT says.
The commissioner of I-T (appeal) upheld addition of Rs47.31 crore in the assessment.
In its order, the ITAT observed that RPR Holding did not have any assets except the assets in the form of shares of NDTV. "Further only purpose of transfer of the shares to that company was to obtain loan by pledging those shares considering the fair market value of the shares of NDTV, which is obviously the listed price of that company. Therefore, it is apparent that if the shares are transferred at Rs4 per share, the assessee will pay capital gain tax only considering the sale value of those shares at Rs4 per share, (if the whole transaction is not looked in to by complex agreement of loans) whereas RRPR Holding will obtain loan on those shares at the listed price of the shares of NDTV limited, free of interest. In a way, it was a methodology 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 Roys," the Bench said.
As observed by the Securities Appellate Tribunal (SAT) in its recent order, RRPR Holding took a loan of Rs350 crore from ICICI Bank Ltd, at an interest rate of 19% per annum. This loan was required to be repaid within a stipulated period. Finding it difficult to repay the interest and principal amount RRPR Holding then took two loans from Vishva Pradhan Commercial Pvt Ltd (VCPL) totalling about Rs400 crore in July 2009 and January 2010.
At present VCPL is controlled by Mahendra Nahta, who is a board member of Reliance Jip Infocomm.
From their individual demat accounts, Dr Roy and Ms Roy transferred a total of 6,25,000 shares of NDTV to their joint demat account. On 19 June 2008, there shares were sold from the Roys' joint demat account. The Roys claimed that the shares sold were long-term capital gains (LTCG) asset and its cost of acquisition was only Rs4,092. The income thus earned was shown as LTCG that was challenged by the Income Tax department.
The assessing officer (AO) held that shares transferred by the Roys from the joint demat account are short-term capital asset as they were acquired only on 28 December 2007 and sold on 19 June 2008 on first in-first out (FIFO) basis applicable to the dematarialsed securities. The AO also considered the cost incurred by the Roys for crediting the shares into the joint demat account on 28 December 2007, accordingly the computation resulted in short-term capital gain (STCG) of Rs1.30 crore each for the Roys as against the claim of LTCG.
In an email to Economic Times
, Dr Roy denied concealment of income, saying "...the ITAT ruling was to do with classification of the capital gains involved — whether short-term or long-term." Stating that the case involves “legal issues and technical tax law issues”, he told the newspaper that an appeal against the tribunal’s findings will be filed once courts reopen in July.
The ITAT also rejected the Roys contention that there was no benefit to them from the sale and purchase transactions as it was within the promoter group. "...the assessee (the Roys) entered into complex agreements with the lenders to realise the sale consideration in guise of loans from lenders,” the Bench stated in its order.
RRPR Holding held shares of NDTV which is a listed company. "Based on the loan taken from VCPL it was alleged that the loan of ICICI Bank was liquidated.
While taking a loan from VCPL certain agreements were entered, namely, that VCPL will give interest free loan for a period of 10 years on the condition that the principal amount would be paid within 10 years and that the VCPL will have a right of first refusal on 50% of the shares in the event the said shares are sold in the market. Further, a call option agreement was made whereby an option was given to two associates of VCPL for transfer of 30% of the shareholding of RRPR Holdings to it at the price of Rs214.65 per share. It was stated that, at the time the loan agreement was executed, the price of the NDTV share was Rs130 per share.
It was also stated that the price of Rs214.65 per share was fixed in order to cover the loan amount of Rs403.85 crore. The agreement further stipulated that RRPR Holding would have the sole control and will not sell the shares without the right of the first refusal by the lender, namely, VCPL," the SAT had mentioned in its order.
After considering the loan agreement between RRPR Holding and VCPL in detail, Securities and Exchange Board of India (SEBI) in its findings stated that the said loan agreement was nothing else but a sham agreement and that no prudent person or entity would enter into such an agreement giving a loan without any interest. In fact, SEBI found that the transfer of money, was to control the listed company NDTV. SEBI further found that the transfer of 9% individual shares of Dr Roy and Ms Roy to its holding company, RRPR Holding amounted to a non-disclosure of transfer of shares inviting violations of disclosure obligations, the SAT order noted.