1991 (3) TMI 195 - AT - Income Tax

Summary

Issues Involved:
1. Claim of capital gain arising from the sale of equity shares.
2. Set off of long-term capital gain against long-term capital loss.
3. Allegation of tax avoidance through the use of an investment company.
4. Inclusion of dividend income in the assessee's hands.
5. Levy of interest under sections 139(8) and 215.

Issue-wise Detailed Analysis:

1. Claim of Capital Gain Arising from the Sale of Equity Shares:
The main issue in the appeal for the assessment year 1984-85 pertains to the capital gain claim from the sale of equity shares of Modi Rubber Ltd. to M/s Touchwood Investments (P.) Ltd., a company in which the assessee's relatives were shareholders and directors. The assessee had previously sold 7000 equity shares of Modi Spg. & Weaving Mills Ltd. in the assessment year 1983-84, resulting in a long-term loss of Rs. 45,000. In the assessment year under appeal, the assessee sold 1599 equity shares of Modi Rubber Ltd., realizing a long-term gain of Rs. 23,185. The assessing officer found that the shares of Modi Spg. & Weaving Mills Ltd. had not realized any dividend, while the shares of Modi Rubber Ltd. yielded a dividend of Rs. 3,198.

2. Set Off of Long-Term Capital Gain Against Long-Term Capital Loss:
The assessee claimed a set off of the long-term capital gain against the long-term capital loss. The assessing officer opined that the sole purpose of floating the investment company was to evade tax, as the investment company could claim a deduction under section 80M, which the assessee could not. The assessing officer correlated the loss claimed in the earlier assessment year as a method of avoiding tax from the sale of long-term assets and invoked the Supreme Court ruling in McDowell & Co. Ltd. v. CTO [1985] 154 ITR 148, stating that schemes of tax avoidance should be uncovered.

3. Allegation of Tax Avoidance Through the Use of an Investment Company:
In appeal, the assessee argued that the transaction was genuine and the resultant benefit to the investment company was as per the law. The CIT(A) dismissed the plea, reiterating observations from a previous case. The assessee's counsel contended that the transaction was at market price and that the investment company held shares of other companies as well. He argued that the revenue's objection was based on the reduction of tax due to the set off, which was a provision allowed by the Act. The counsel cited Supreme Court rulings to support the argument that not all transactions between relatives are colorable.

4. Inclusion of Dividend Income in the Assessee's Hands:
The assessing officer included the dividend income from the shares sold in the assessee's hands, treating the transaction as not a sale. The assessee argued that the transaction was at arm's length and the benefit of section 80M to the company was conferred by the statute, not by the assessee. The Tribunal held that the transaction was genuine and at arm's length, and the set off of the capital loss against the capital gain was justified. The inclusion of the dividend income in the assessee's hands was deemed improper and deleted.

5. Levy of Interest Under Sections 139(8) and 215:
The issue of levy of interest under sections 139(8) and 215 was raised on the grounds of non-application of mind. The Tribunal set aside this issue to the assessing officer, allowing an opportunity for proper application of mind.

Conclusion:
The appeals were allowed in part, upholding the assessee's claim for set off of the long-term capital loss against the long-term capital gain and deleting the inclusion of the dividend income in the assessee's hands. The issue of levy of interest was set aside for reconsideration by the assessing officer.