Reliance Group Chairman Anil Ambani today said with 90 per cent of defence equipment being imported, there is huge opportunity for domestic manufacturing and his group has identified two locations in Madhya Pradesh for setting up production facilities. (Reuters)

In a major relief to Anil Ambani-led Reliance Communications, the Supreme Court on Tuesday dismissed the income tax department’s appeal seeking to tax the proceeds of its $1.5-billion foreign currency convertible bonds (FCCBs) issued by the telecom firm nearly a decade ago.

While the company said the apex court has quashed a “contingent tax liability of RCom for about R4,800 crore”, the I-T department in its appeal had claimed a tax liability of R2,236.01 crore for assessment year 2007-08.

A bench led by Justice Kurian Joseph said: “We find no reason to entertain this special leave petition, which is, accordingly, dismissed.”

RCom had issued $1.5 billion (R6,485 crore) of FCCBs in 2007 in line with RBI’s extant guidelines and applicable laws. Subsequently, the I-T department took the view to assess the FCCB proceeds as ‘unexplained cash credits’ and had raised tax demands thereon, the company statement said.

Challenging the Bombay High Court’s March 28 judgment that dismissed its petition, the department in its appeal said the funds by way of FCCBs were introduced by RCom in its books to the tune of R6,485 crore without furnishing details in respect of the actual subscribers to the FCCBs.

“The crucial conditions regarding identity, genuineness and creditworthiness of the subscribers to the FCCB as required u/s 68 of the Income Tax Act was not examined by the Assessing officer (AO) during the assessment proceedings,” it said.

Besides, out of the proceeds of FCCB funds, around R5,142 crore was given to Reliance Info Investments, which invested it and earned interest income of R157.95 crore, it further said, adding that the assessee had also transferred its assets by a revocable transfer which in effect meant transfer of income without the transfer of the assets and this aspect of clubbing of income earned by the transferee company in the hands of the assessee was never considered by the AO, thus making the assessment order erroneous and prejudicial to the interests of the Revenue.

The department further told the apex court that there was a component of Mark-to-Market loss on foreign exchange derivatives which had been included under the head foreign currency exchange fluctuation loss/gain (net) under the financial charges.

“The said Mark-to-Market losses as on the reporting day are only notional losses and contingent in nature and could not have been allowed to be set off against the taxable income in terms of Section 43(5) of the

I-T Act. This issue was not dealt with the AO at all while framing the assessment order,” the appeal stated.

The company had declared nil income in its tax returns filed in November 2007. The case was selected for scrutiny in March 2009 and a notice was issued to the company. The commissioner of income tax in March 2012 after giving opportunity to the assessee to clear its stand concluded that the AO had failed to examine the assessments properly and the assessment order was set aside. Both the Income Tax Appellate Tribunal and the Bombay High Court ruled in RCom’s favour in February 2013 and March this year, respectively.

While Additional Solicitor General Pinky Anand appeared for the revenue authorities in the SC, RCom was represented by senior counsel Soli Dastur and counsel Mahesh Agarwal.