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Issues Involved:
1. Substitution of full value of consideration with fair market value for shares transferred. 2. Classification of 23,90,000 shares as short-term or long-term capital assets. 3. Disallowance of interest paid under section 57(iii) of the Income-tax Act, 1961. Issue-wise Detailed Analysis: 1. Substitution of Full Value of Consideration with Fair Market Value: The primary issue was whether the Assessing Officer (AO) could substitute the full value of consideration received for the shares transferred by the assessee with a presumed fair market value. The AO had determined that the sale to Shri R. P. Mittal was a colourable transaction, relying on the decision in CIT v. L.N. Dalmia, and substituted the sale price with the fair market value of Rs. 185.68 per share, resulting in a computed capital gain of Rs. 37.60 crores against the declared short-term capital loss of Rs. 8.64 crores. The Tribunal referred to Section 48 of the Income-tax Act, which prescribes the mode of computation of capital gains, and noted that the term "full value of consideration" is distinct from "fair market value." The Tribunal cited Supreme Court decisions in CIT v. Gillanders Arbuthnot and Co. and CIT v. George Henderson and Co. Ltd., which clarified that in the absence of specific provisions allowing substitution of fair market value, the actual consideration received should be used for computing capital gains. The Tribunal concluded that the AO and the Commissioner of Income-tax (Appeals) (CIT(A)) could not substitute the fair market value in place of the sale consideration received by the assessee. 2. Classification of 23,90,000 Shares as Short-term or Long-term Capital Assets: The second issue was whether the 23,90,000 shares allotted to the assessee on April 4, 2004, but delivered on July 27, 2004, should be treated as long-term or short-term capital assets. The assessee argued that the shares were allotted on April 4, 2004, based on Board Circular No. 704 dated April 28, 1995, which allows the period of holding to be reckoned from the date of the broker's note. The Tribunal examined the evidence and noted that the assessee failed to produce the minutes of the board meeting or any communication to the Registrar of Companies to substantiate the claim of allotment on April 4, 2004. The Tribunal also referred to the decision in S.N. Zubin George v. CIT, which held that the date of issue of share certificates is the date of allotment. The Tribunal concluded that the shares should be treated as short-term capital assets, as the assessee held them from July 27, 2004, to the date of transfer, which was less than 12 months. 3. Disallowance of Interest Paid under Section 57(iii): The third issue was the disallowance of Rs. 22,03,822 under section 57(iii) of the Income-tax Act. The assessee claimed that the interest paid on borrowings was for earning interest income from Hotel Queen Road Pvt. Ltd. The AO and CIT(A) disallowed the claim, stating that there was no nexus between the borrowings and the interest earned, as the borrowed funds were used for acquiring shares. The Tribunal referred to the principles laid down in various Supreme Court decisions, including Seth R. Dalmia v. CIT and CIT v. Rajendra Prasad Moody, which require a direct nexus between the expenditure and the income earned. The Tribunal found that the dominant purpose of the borrowings was to repay the loan from Shri R. P. Mittal, and not to earn interest income. Therefore, the interest paid was not deductible under section 57(iii). Conclusion: The Tribunal allowed the appeal in part. It held that the substitution of fair market value in place of the sale consideration was not permissible, thus allowing the assessee's claim on this ground. However, it upheld the CIT(A)'s decisions on treating the shares as short-term capital assets and disallowing the interest paid under section 57(iii).
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