Whether or not the debentures are loans covered u/s 269SS

(2013) TaxCorp(LJ) 1637 (ITAT)

Income Tax Section 271D, 269SS, 269T

Whether or not the debentures are loans covered u/s 269SS

F.Y 2004-05, the assessee company has shown 5171.40 crores under the head as “Optionally Fully Convertible

Debentures” (OFCDs). The same is shown as ‘Unsecured Loans’ in the Balance Sheet (Schedule-3 of Balance Sheet). The Auditors of the assessee considered the amount under OFCD as securities and not as loans/deposits and have given the following note:-

‘The Company has also received subscription through private placement in respect of Optionally Fully Convertible Debentures. As per the expert opinion of the Solicitor and Advocate obtained by the company, subscription received on issue of OFCD which is in the nature of Securities and not in the nature of loan or deposit within the meaning of Section 269SS of the Income Tax Act. Relying on the same the subscription received under OFCD has not been considered to be falling within the purview of Section 269SS of the Income Tax Act although in the Tax Audit Report issued by us for financial year 2002-03 the same were considered by us for the purpose of Section 269SS of the Income Tax Act in absence of legal opinion to this effect.’

Before us, on this issue, the Ld. DR has contended that it has been conclusively held by the Hon’ble Delhi High Court in the case of ‘CIT vs. Jet Life India (2012) 6 TaxCorp (DT) 50022 (DELHI)’ that debentures are loans and that following the legislative amendment w.e.f. 01.06.2002, loans are covered under Sections 269SS and 269T and, therefore, there is no merit in the contention of the assessee that the debentures issued by it were not loans and so, the provisions of Sections 269SS and 269T of the Act were not applicable.

The ld. counsel for the assessee, on the other hand, has sought to place reliance on the order dated 31.08.2012 passed by the Hon’ble Supreme Court of India in Civil Appeal No.9813 of 2011, in ‘Sahara India Real Estate Corporation Ltd. and Others vs. Securities & Exchange Board of India and Anr.’, along with Civil Appeal No.9833 of 2011 (copy placed on record). It has been contended that in the said case, the Hon’ble Supreme Court has conclusively laid down that debentures are Securities. Apropos ‘Jet Life’ (supra), it has been contended that the said judgement was delivered prior to the amendment in law.

In the rejoinder, the Ld. DR has contended that the decision (supra) of the Hon’ble Supreme Court is with regard to the SEBI Regulations, rendered in the context of the Companies Act; and that since this decision is not with reference to the IT Act, the same is not applicable.

Undisputedly, the terms ‘loan’ and ‘deposit’ have nowhere been defined in the IT Act. Therefore, recourse has to be taken to the definition of these terms in cognate Acts. For the purposes of the Income Tax Act, as such, in various decisions, reference has been made, inter alia, to the Companies Act, 1956, the Companies (Acceptance of Deposit) Rules, 1975, the SEBI Act, the Securities & Exchange Board of India (Disclosure and Investor Protection) Guidelines, 2000, the Securities Contracts (Regulation) Act, 1956, etc.

In ‘Sahara India Real Estate Corpn. Ltd. & Others’ (supra), inter alia, the assessee had contended that OFCDs issued by it were convertible bonds falling within the scope of Section 28(1)(b) of the SCR Act and that they were not ‘securities’; and that at any rate, the provisions of the SEBI Act and Section 67 of the SCR Act were not applicable to such OFCDs, which had been found to be ‘hybrid’ (in para 106 of the judgement). It was observed by the Hon’ble Supreme Court (in para 112) that the OFCDs issued had the characteristics of shares and debentures and fell within the definition of Section 2 (h) of the SCR Act, such OFCDs continuing to remain debentures till they were converted; that in other words, the OFCDs issued by the assessee were debentures in presenti and became shares in futuro; that even if the OFCDs were hybrid securities as defined in Section 2(19A) of the Companies Act, they shall remain within the purview of the definition of ‘securities’ in Section 2 (h) of the SCR Act; that the assessee had treated the OFCDs only as debentures in the IMRHP, application forms and also in their balance sheets; that the term ‘securities’ defined in the Companies Act has the same meaning as that in the SCR Act, which would also cover the species of ‘hybrid’ u/s 2(19A) of the Act; that since the definition of ‘securities’ u/s 2 (45AA) of the Companies Act includes ‘hybrid’, SEBI has jurisdiction over hybrids like OFCDs issued by the assessee, since the expression ‘securities’ has been specifically dealt with under Section 55A of the Companies Act; and that the assessee had contended that SEBI had no jurisdiction over the hybrids and that ‘hybrids’ would be treated as ‘securities’ within the meaning of the Companies Act, but cannot be treated as ‘securities’ within the meaning of the SEBI Act. Dwelling upon the issue as to whether ‘hybrids’ can also be included in the definition of the term ‘securities’ for the purposes of the SEBI Act, the Hon’ble Supreme Court observed that that “hybrids” are included within the term “securities” not only for the purposes of Companies Act, but also, under the SEBI Act. SEBI therefore, would have jurisdiction even over “hybrids”, even under the provisions of the SEBI Act.”

Now, undisputedly, the OFCDs of the assessee before us are no different from those of ‘Sahara India Real Estate Corpn. Ltd. & Others’ (supra), i.e., the assessee before the Hon’ble Supreme Court in the aforesaid case, and once such OFCDs are securities, they are neither ‘loans’, nor ‘deposits’. Further, it is seen that as per Explanation 2 to Section 2 (42A) of the Income Tax Act, the expression ‘security’ shall have the meaning assigned to it in Section 2 (h) of the Securities Contracts (Regulation) Act, 1956. Section 2 (h) (i) of the Securities Contracts (Regulation) Act, 1956 defines ‘securities’ to include, inter alia, debentures or other marketable securities of a like nature in or of any incorporated company or other body corporate.

Hence, in keeping with the decision of the Hon’ble Supreme Court in ‘Sahara India Real Estate Corpn. Ltd. & Others’ (supra), the OFCDs of the assessee before us are neither ‘loans’, nor ‘deposits’.

The objection taken by the department that the decision of the Hon’ble Supreme Court is not with regard to the IT Act, but it relates to the Companies Act and the SEBI Act, there is no dispute to this fact. But, as discussed herein before, since the Income-tax Act does not define the terms ‘loan’ and ‘deposit’, recourse has to be taken to cognate Acts and for the purposes of ‘debentures’ and ‘securities’, the Companies Act is of the same family, kind, or nature, or is a related or allied Act, so far as concerns the Income-tax Act. The same remains the position qua the SEBI Act and the Securities Contracts (Regulation) Act, 1956, to the extent required.

When the OFCDs of the assessee do not fall under and cannot be equated with receipt of ‘loan’ or ‘deposit’ under the provisions of Section 269SS of the IT Act, evidently, no violation of the said Section can be said to have been committed by the assessee. Hence, penalty u/s 271D of the IT Act is entirely not attracted. As such, the order of the Ld. CIT (A)  does not contain any error or infirmity in this regard. The same is upheld. OFCDs of the assessee, Sahara India Commercial Corporation Ltd. are neither ‘loans’, nor ‘deposits’.

Now, when the issue as to whether or not the OFCDs of the assessee are ‘loans’ covered u/s 269SS of the IT Act has been decided in favour of the assessee as above, the question of the assessee having been prevented by reasonable cause within the meaning of Section 273B of the IT Act for not complying with the provisions of Section 269SS of the Act, no longer survives. Accordingly, the action of the Ld.CIT (A) in deleting the penalty imposed on the assessee under Section 271D of the IT Act is confirmed.

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Rupesh Srivastava

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