2014 (8) TMI 75 - HC - Income Tax

Acceptance of book loss on sale of shares Sale colourable device or not shares were sold to the joint venture partner - Held that - Assessee was required to obtain approval/permission of the Reserve Bank of India and Ministry of Industry, Department of Industrial Policy and Promotion to enable Plansee to purchase existing shareholding of the assessee - assessee had relied upon the valuation report, which was accepted by the Reserve Bank of India, Exchange Control Department when they granted express permission - Revenue submitted that the valuation report was ambiguous and mentions that the Seil Tizit Ltd. was not a listed company and the market price was not available. On this basis it cannot be held that the consideration declared and paid was sham and not the correct amount, which was paid - valuers do not normally undertake the exercise and valuation are made accepting and on the basis of audited accounts - It was open for the AO to point out and state why and for what reason the figures in the books of account were false and incorrect and the data/information was unreliable and should not have been the basis of the valuation - valuation was undertaken, report made as was required to get requisite approval under the exchange control regulations - it cannot be assumed that underhand or undeclared sale consideration was paid No substantial question of law arises for consideration Decided against Revenue.

Summary

Issues Involved:
1. Acceptance of book loss/indexed loss on sale of shares.
2. Allegation of the sale being a colourable device.
3. Determination of true and correct sale price of shares.
4. Compliance with regulatory approvals and valuation reports.

Detailed Analysis:

1. Acceptance of Book Loss/Indexed Loss on Sale of Shares:
The primary issue pertains to the acceptance of a book loss of Rs. 10.12 crores and an indexed loss of Rs. 13.62 crores on the sale of shares at Rs. 2.02 per share of Siel Tizit Ltd. The shares were sold by the respondent assessee to their joint venture partner, Plansee Tizit Aktiengesellschaft (Plansee), an Austrian company. The Assessing Officer (AO) did not accept the capital loss, asserting that the sale was a colourable device.

2. Allegation of the Sale Being a Colourable Device:
The AO cited several reasons for rejecting the capital loss:
- The close connection between the joint venture partners.
- Discrepancies in the sale price compared to the rights issue price.
- Timing of agreements and valuations suggesting pre-arranged transactions.
- Lack of premium payment for rights renunciation.
- Retention of an option to buy back shares at mutually agreed prices.
- The sale's rationale being inconsistent with the company's financial needs.
The AO concluded that the sale was a mutual arrangement to sell shares at lower prices, thereby passing off capital losses without parting with funds. The AO referenced the Supreme Court's judgment in McDowell and Co. Ltd. Vs. Commercial Tax Officer, emphasizing that tax planning must be within the framework of law and not involve colourable devices.

3. Determination of True and Correct Sale Price of Shares:
The court noted that the Revenue did not claim the transaction was bogus or lacked commercial reasons. The shares were indeed transferred, and the real issue was whether the sale price was true and correct or if there was undeclared consideration. The AO's reliance on the face value of shares during the rights issue was deemed insufficient to disregard the sale price of Rs. 2.02 per share. The court highlighted the financial difficulties of the respondent assessee, which led to their non-subscription of right shares, reducing their shareholding and necessitating further capital infusion in the loss-making venture.

4. Compliance with Regulatory Approvals and Valuation Reports:
The transaction required approvals from the Reserve Bank of India (RBI) and the Ministry of Industry, Department of Industrial Policy and Promotion. The Ministry granted approval with conditions, including no royalty payment and an option for the Indian company to repurchase shares within three years. The RBI also approved the transaction, noting compliance with SEBI/RBI guidelines. The valuation report, accepted by the RBI, was criticized by the Revenue for its reliance on provided data without verification. However, the court held that the AO could have conducted their own valuation if the data was deemed unreliable. The court found no evidence of undeclared or underhand consideration.

Conclusion:
The court dismissed the appeals, concluding that the transaction was not a colourable device and the sale price was true and correct. The regulatory approvals and valuation report were deemed valid, and no question of law was framed. The judgment emphasized the need for genuine commercial reasons and compliance with legal frameworks in tax planning.