TMI Blog2012 (2) TMI 589X X X X Extracts X X X X X X X X Extracts X X X X ..... ment proceedings AO noticed that assessee has paid interest to the tune of ₹ 64,01,824/- and has also received interest amounting to ₹ 32,62,806/- and finance charges of ₹ 7,00,636/-. It was noted that assessee has granted certain interest free advances, therefore, a show cause notice was issued to the assessee as to why proportionate interest should not be disallowed u/s.36[1] and also proportionate disallowance u/s.14A. It was mainly contended that assessee had sufficient interest free funds and interest free loans were granted out of such interest free funds and, therefore, there was no need to disallow any interest. It was also represented that sec.14A was not applicable to the assessee. The AO after examining the submissions worked out the availability of funds as under: INTEREST FREE FUNDS 31.3.96 31.3.99 Share Rs.2,11,240 Rs.2,11,240 Reserves surplus Nil Rs.1,04,93,970 Int. free borrowings Rs.6,04,52,070 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... herefore, interest free advances to the extent of ₹ 8,32,34,434/- were covered by the interest free funds and accordingly there was no justification in disallowance of interest and accordingly the disallowance on account of interest was deleted. In view of this enhanced funds availability disallowance u/s.14A was also deleted. 5. Before us Ld. DR mainly relied on the order of the AO and pointed out that AO had correctly worked out the disallowance. It was submitted that availability of funds was considered as per the chart furnished by the assessee therefore the disallowance was justified. In respect of disallowance u/s.14A he argued that the matter may be remanded to the file of the AO in the light of the decision of the Hon'ble High Court in the case of Godrej Boyce Mfg. Co.Ltd. vs. DCIT [328 ITR 81]. 6. On the other hand, Ld. Counsel of the assessee reiterated the submissions made before the first appellate authority. He also pointed out that it is not correct that AO has calculated the availability of funds as per the chart furnished by the assessee and in this regard referred to various documents in the paper book. In respect of disallowance u/s.14A he submit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... refore, in our opinion, ld. CIT(A) has correctly worked out the availability of interest free funds and the working clearly shows that interest free funds were available to the assessee to the extent of ₹ 9,00,57,465/- and interest free advances were only of ₹ 8,32,34,434/-. Thus, all interest free advances have been given out of interest free funds and no disallowance is called for. Further, even if the so called investment in shares amounting to ₹ 35,72,162/- had come from interest free advances, because after giving interest free advances from interest free funds, assessee will still be left with the surplus funds as under: Interest free funds available Rs.9,00,57,465 Less: Interest free advances Rs.8,32,34,434 Balance surplus funds Rs.68,23,031 Therefore, no disallowance can be made u/s.14A in respect of interest. As far as disallowance of expenditure is concerned, we agree with the submissions of the Ld. Counsel of the assessee that no purpose would be served if the matter is remanded back because a small amount of ₹ 39,474/- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the shares of Hotel Jal Ltd. He observed that shares have been sold to the wife and daughter of the director and evidence of transfer of shares was not available, therefore, it was merely a sham transaction. He also found that it was stated that certain amounts were due by Plus Channel to Prasar Bharati Broadcasting Corporation of India (PBCI) and it was stated that Plus Channel could not meet the commitment made to PBCI and that is why PBCI had moved a winding petition. According to the AO when assessee already knew this information, then why such shares were purchased at all. He also noticed from the balance sheet of Plus Channel that shareholders funds have increased from ₹ 25.28 crores on 31-3-1997 to ₹ 35.45 crores, whereas losses reflected in the profit loss account had also increased from ₹ 7.02 crores on 31-3- 97 to ₹ 17.83 crores on 31-3-98 and, therefore, there was no justification for purchase of such shares. In this background he was of the view that this is a sham transaction and accordingly he disallowed the loss incurred on account of sale of shares of Plus Channel and Andromeda Holdings Pvt. Ltd. 9. On appeal before the Ld. CIT[A] it w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oard s resolution confirming the same was filed. Once a transaction of transfer has been registered by the company the same is effective to pass on the beneficial ownership in such shares and transferee gets all the rights as the shareholder. Even the annual return of the company clearly shows that shares have been transferred to the persons whom they are claimed to have been sold. 11. It was also pointed out that there were news papers report in Business Standard in their Bombay edition that even Reliance Group was interested in investing in this company because they wanted to venture into the entertainment business. Plus Channel was already in the business of producing programs of T.V. serials and music albums and had also produced some Hindi movies, therefore, the whole transaction could not be called a sham transaction. The ld. CIT(A) after examining the above submissions found that out of the 60,000 shares of Andromeda Holdings Pvt. Ltd which were purchased during the previous year relevant to the A.Y 1996-97 for ₹ 1,00,20,000/-, 30,000 shares were sold to Ms. Dhyuti Choksi on 31-7-98 and balance 30,000 shares were sold to Mr. Pankaj Pandya on 8-3-1999. The sales ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hased the same for ₹ 100 per share. However, during the enquiries made that on the dates of transaction the market value was only ₹ 58 per share which was admitted by the authorised representative of the appellant. Accordingly, ld. CIT(A) reduced the cost of these shares to ₹ 58 per share and the total cost of the shares was reckoned at ₹ 1,45,00,000/-, instead of ₹ 2.5 crores. Accordingly the loss on sale of Plus Channel was determined at ₹ 1,15,00,000 [cost of shares ₹ 1,45,00,000 minus sale price ₹ 35,00,000] and not ₹ 2,15,00,000/- which was held to be allowable. 12. Before us Ld. DR carried us through the assessment order and pointed out that AO has noted various discrepancies. He argued that when Plus Channel was continuously incurring losses what was the justification for purchase of such shares. the shares have been purchased and then sold to the wife and daughter of the director which clearly shows that these shares were purchased only for the purpose of generating losses to be set off against the profit on sale of shares of Hotel Jal Ltd. The transaction has not been proved fully and even the copy of the share certi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es but since renowned personalities were involved, assessee preferred to buy more shares in April, 98. The losses were basically due to dispute regarding excise to be charged on introduction of films etc. and every one was hopeful that such excise duty would be removed because even FIICI (Federation of Indian Industry Commerce). However, ultimately when the dispute with PBCI could not be settled the assessee decided to sell the shares. since Plus Channel could not make the payment of PBCI, PBCI moved a petition for winding up and ultimately the company went into liquidation. Therefore, at best, Revenue can make a case that shares have been sold to the wife and daughter of the director of the assessee company to generate some losses; but in that case it amounts to only tax planning and it cannot be said that the transaction is sham or a colourable device has been used. He pointed out that even share certificates could not be produced because all the records were taken over by the liquidator of the company. He referred to the decision of the Hon'ble Supreme Court in the case of Walfort Share And Stock Brokers P. Ltd. [326 ITR 1] wherein assessee had purchased certain units of C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of law, therefore, same cannot be construed as sham and loss from this transaction has to be allowed in terms of the decision of the Hon'ble Supreme Court in the case of Walfort Share And Stock Brokers P. Ltd. [supra], even if same is assumed to be done as tax planning. 14. While concluding his arguments, Ld. Counsel of the assessee submitted that the decision in the case of Durga Prasad More [supra] is distinguishable because in that case the issue was on interpretation of the documents and not of sham transaction, whereas the decision in the case of Walfort Share Brokers P. Ltd. [supra] is directly on the issue raised before us. In any case, ld. CIT(A) has already reduced the loss claimed by the assessee from ₹ 2,15,00,000/- in respect of shares of Plus Channel to ₹ 1,15,00,000/- by reducing the cost of shares and the assessee has not filed any appeal on this aspect and has accepted the reduced loss. Therefore, the whole transaction has to be viewed with this perspective also. 15. We have considered the rival submissions carefully in the light of the material on record as well as the judgments cited by both the parties. We find force in the submissions of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d a loss of ₹ 17.87 crores against the equity shares of ₹ 16 crores which means whole of the equity has already been eroded. The net worth of the company was computed at ₹ 5,37,37,158/- against the outstanding preference shares of 92800000. Thus, the value of each share would work out to ₹ 58 per preference share. The ld. CIT(A) has already reduced the cost of these shares to ₹ 58 per share and reduced the consequential loss incurred on sale of such shares against which assessee has not filed any appeal. When because of the dispute with PBCI the company went into liquidation naturally there would be an apprehension of further loss and if at that stage shares were sold at a loss, it cannot be said that the transaction is sham. Again, merely because shares have been sold to Ms. Vipula Choksi the wife of the director of the assessee company, would not make the transaction sham. Another fact which has been considered by the AO is that assessee could not produce copies of the share certificates. It was stated during the course of the hearing that because of the liquidation proceedings all papers and files were taken over by the liquidator. Though we do not ..... X X X X Extracts X X X X X X X X Extracts X X X X
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