2003 (7) TMI 38 - HC - Income Tax

Avoidance of tax applicability of provisions of section 94 - Assessing Officer dealt with the facet of sale of shares and came to hold that the assessee had sold shares worth Rs. 5,40,640 of Perfect Refractories Limited to the directors of the company at the face value of Rs. 10 per share and then the transfer/sale had taken place a month before declaration of dividend. It was found on scrutiny of the accounts that the book value of these shares was Rs. 65 per share. In this backdrop, the assessee was specifically asked to show cause as to why the provisions of section 94 of the Act should not be invoked as there had been avoidance of tax - Tribunal was justified in holding that the assessee was entitled to the benefit of the provisions of section 94(3)(b) of the Income-tax Act, 1961, in respect of the dividends on the shares transferred to one of its directors because there has been no systematic effort by the assessee to avoid the tax. It has been done only once - Further assessee is entitled to deduction u/s 36(1)(vii)

Summary

Issues Involved:
1. Deletion of addition of Rs. 91,748 under section 94(2) of the Income-tax Act, 1961.
2. Applicability of section 94(3)(b) regarding dividends on shares transferred to a director.
3. Allowability of Rs. 3 lakhs as a bad debt under section 36(1)(vii) of the Income-tax Act, 1961.

Issue-wise Detailed Analysis:

1. Deletion of Addition of Rs. 91,748 under Section 94(2):
The Tribunal deleted the addition of Rs. 91,748 made by the Assessing Officer, who had invoked section 94(2) of the Income-tax Act, 1961. The Assessing Officer observed that the assessee-company sold shares of Perfect Refractories Limited at face value to its directors just before the declaration of dividends. The shares had a book value of Rs. 65 per share, and the sale at face value was seen as an attempt to avoid tax. The Tribunal, however, found that the transaction was covered under the Explanation to section 94(3)(b), which exempts certain transactions from the applicability of section 94(2). The Tribunal concluded that the transaction was not systematic tax avoidance but an isolated instance, thus justifying the deletion.

2. Applicability of Section 94(3)(b) Regarding Dividends:
The Tribunal held that the assessee was entitled to the benefit of section 94(3)(b) concerning dividends on shares transferred to a director. The Revenue argued that the transfer was made with special knowledge of the impending dividend declaration, thus avoiding tax. However, the Tribunal accepted the assessee's contention that the transfer was not systematic tax avoidance but an exceptional and isolated event. The Tribunal's interpretation aligned with the judicial precedent set by the Gujarat High Court in Sakarlal Balabhai and the Punjab and Haryana High Court in Gurdial Singh Uppal, which clarified that "exceptional and not systematic" means the avoidance must be an exception to the regular practice and not part of a regular reprehensible practice.

3. Allowability of Rs. 3 Lakhs as a Bad Debt under Section 36(1)(vii):
The Tribunal allowed the deduction of Rs. 3 lakhs as a bad debt under section 36(1)(vii). The Assessing Officer had disallowed this, arguing that the debt had not been proven irrecoverable as the loanee company, Moradabad Syntex Ltd., had not been declared sick, nor was it in liquidation. However, the Tribunal considered the financial condition of the loanee company, which was approaching the BIFR for revival, and concluded that the debt was indeed irrecoverable. The Tribunal's decision was supported by the CBDT circular, which simplified the process of claiming bad debts, stating that once a debt is written off in the accounts, it is considered bad. The Tribunal's finding was deemed a question of fact, not involving any substantial question of law.

Conclusion:
The High Court upheld the Tribunal's decision on all counts. It agreed that the transaction involving the transfer of shares was not systematic tax avoidance and was covered under the Explanation to section 94(3)(b). The Court also concurred with the Tribunal's finding that the Rs. 3 lakhs written off as a bad debt was allowable under section 36(1)(vii), as it was a factual determination supported by the financial condition of the loanee company and the relevant CBDT circular. The appeal was dismissed without any order as to costs.