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TMI Blog2012 (3) TMI 175X X X X Extracts X X X X X X X X Extracts X X X X ..... 2 - TMI - 208574 - Supreme Court Of India) made it clear that a colourable device cannot be a part of tax planning. Where a transaction is sham and not genuine, it cannot be considered to be a part of tax planning or legitimate avoidance of tax liability. In the present case the purchase and sale of shares, so as to take long term and short term capital loss was found as a matter of fact by all the three authorities to be a sham. See (Sumati Dayal vs CIT (1995 - TMI - 5469 - Supreme court) – Decided against the assessee. In respect of guarantees – Held that:- The surrounding circumstances can be looked at, but not without considering the evidence led by the party in support of its stand. Hence, it would be proper to remand the matter to the Tribunal to reconsider the issue in respect of loss on account of business of providing guarantees and pass an appropriate orders thereon. - INCOME TAX APPEAL NO.5518 OF 2010 - - - Dated:- 6-3-2012 - DR. D.Y. CHANDRACHUD M.S. SANKLECHA, JJ. Mr. Sanjiv M. Shah Advocate for the Appellant. Mr. Vimal Gupta Advocate for the Respondent. JUDGMENT: (Per M.S.SANKLECHA, J.) This appeal by the assessee under Section 260A o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5) 214 ITR 801 (SC) without any party to the proceedings relying upon the same before the Tribunal. Consequently, it is submitted by Counsel that there was a violation of the principles of natural justice. It was submitted that the Appellant would have been able to distinguish the applicability of the decision to the facts of its case. 3 During the course of the hearing, we had suggested to Counsel for the Appellant that since it is settled law that what is recorded in the order of the Court is normally accepted as correct record of what transpired at the hearing, therefore, if the Appellant is of the view that that the impugned order does not reflect the proceedings before the Tribunal correctly then in such a case he may move the Tribunal either by an application for rectification or review. This was particularly in view of the fact that the Appellant was represented by different Counsel before the Tribunal. However, the learned Counsel for the Appellant informed us that he would press this appeal and was not inclined to move the Tribunal by way of application for rectification and/or review. 4 In view of the above, the appeal was taken up for consideration. The facts leading ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4 Galactica Investment Ltd. 12.03 Cr. 800000 149998 2 950000 100% 48.12 Cr. This amount of Rs.48/- crores came into the hands of the Appellant company from one G.K.Rathi Group which consisted of the following entities making the following contribution to the Appellant company: 1. GKAK Rathi HUF 34.87 crores (28/3 to 30/3) 2. Subahu Investment Ltd. 5.50 crores (28/3) 3. Viplav Trading Ltd. 1.30 crores (30/3) 4. Kosha Investments (balances) 6.325 crores (29/3/00) 48.00 crores The Assessing Officer also noted the fact that the G. K. Rathi Group was the same person in favour of whose company, the Appellant had given the guarantee to Vysya Bank Ltd. which ultimately led to sale of land to Vysya Bank Ltd. resulting in a capital gain of Rs.49.73 crores to the Appellant. The amount invested by the Appellant in the aforesaid four subsidiary companies viz. Matterhorn Investments (P) Ltd., Mountblance Investments (P) Ltd., Fircast Investments (P) Ltd and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rough that party by circular transaction. Thus the Bank accounts got squared up showing no negative balance or positive balance at the end of a particular date on account of the activity. It is relevant to note that the Director of the four subsidiary companies in his statement stated that the four subsidiary companies decided to issue shares at the direction of the Appellant. The purchase of the shares of the four subsidiary companies as mentioned above was completed during the Assessment year 2000-01 i.e. financial year ending 31 March 2000. Thereafter, in the present assessment year 2001-02 as the Appellant was conscious of the capital gain being made on the sale of land to Vysya Bank Ltd. the shares of all the four subsidiary companies were sold at a loss to one Radha Financial Services Private Ltd. and one Diplomat Trading Private Ltd. The shares of the all the aforesaid companies were sold at a value of Rs.5/- per share to Radha Financial Services Private Ltd . and Diplomat Private Ltd. Consequently, the 1,50,000 shares held since 1992 and earlier when sold at Rs.5/- per share were available to the Appellant as part of its long term capital loss of the present assessment y ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re, the price of Rs.800/- (including a premium of Rs.700/-) per share in March 2000 i. e. also in the Assessment year 2000-01 was not justifiable at all. This purchase of shares by converting loan into equities was only done, as the Appellant company was aware of the forthcoming capital gain on sale of land in the next Assessment year i. e. 2001-02. Therefore it was found that the Appellant wanted to create an artificial loss in the next Assessment year so as to reduce the amount of tax payable on account of capital gain. The Assessing Officer enquired from the Appellant company the reasons for investment in Killick Halco Ltd. at the premium of Rs.700/- per share. The reason offered by the Appellant was that they expected revival in the fortune of Killick Halco Pvt. Ltd. in the near future. The Appellant thereafter in the present Assessment year i. e. 2001-02 sold the shares of Killick Halco Ltd. at a price of Rs.83/- per share by selling it to its group company viz. Snowcem India Ltd. The purchase of 50,000 shares was at exorbitant price of Rs.800/- per share and the sale of the share to a group company at a price of Rs.83/- per share enabled the Appellant to show a short term cap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as under: The learned Deputy Commissioner of Income tax ought to have allowed the entire amount of consideration determined on acquisition of land by Vysya Bank ltd. as business loss incurred by the Appellant in the course of carrying on of business of providing guarantees. 5 It was the case of the Appellant that they have executed a letter of guarantee to the extent of Rs.100/- crores in favour of Vysya Bank Ltd. Mumbai for consideration of the bank extending financial facilities to Geekay Exim (India) Ltd., a company belonging to G. K. Rathi Group. At that time in 1996 an agreement was entered into between Geekay Exim India Ltd. and the Appellant company inter alia providing that Geekay Exim India Ltd. would indemnify the Appellant company against all actions and proceedings that may be made by Vysya Bank Ltd. in connection with letter of guarantee executed by the Appellant company in favour of Vysya Bank Ltd. In consideration of the above guarantee, it was agreed that Geekay Exim India Ltd. shall deposit and keep deposited with the Appellant at all times a sum of 10% of the facilities sanctioned by Vysya Bank Ltd. to Geekay Exim India Ltd. on the basis of the guarantee. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... viding of guarantee to Vysya Bank Ltd. was not in the normal course of Appellant s business and the resulting loss could not be allowed as a trading/business loss. 7 The aforesaid finding of the CIT (Appeal) was upheld by the Tribunal in its Order dated 6 April 2010.The Tribunal concluded that the loss itself was not genuine and therefore, the same cannot be allowed as deduction. The Tribunal inter alia held that though the Memorandum of Association of the Appellant company did in its object clause provide for doing the business of giving guarantees, the Appellant had not once in the last 50 years of its existence issued any guarantee and taking into account the over all relations between G.K. Rathi Group and the Appellant company, the loss on account of guarantee was not considered to be a genuine business activity. 8 The Tribunal in the impugned Order held that though the amounts on account of Guarantee commission were accounted in the assessment year 2000-01 they were never received by the Appellant and there is nothing on record to show that any attempt was made to recover the same. The Tribunal confirmed the finding of the CIT(A) that the Appellant company never bothered t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in breach of the proviso to Rule 11 of the Income Tax Appellate Tribunal Rules, 1963. Rule 11 of the Income Tax Tribunal Rules reads as under : The Appellant shall not, except by leave of the Tribunal, urge or be heard in support of any ground not set forth in the memorandum of appeal, but the Tribunal, in deciding the appeal, shall not be confined to the grounds set forth in the memorandum of appeal or taken by leave of the Tribunal under this rule : Provided that the Tribunal shall not rest its decision on any other ground unless the party who may be affected thereby has had a sufficient opportunity of being heard on that ground. The proviso to the Rule 11 would have no application to the present facts, as the Tribunal has not based its decision on a ground which had not been urged by the parties before it. The decision of the Supreme Court supports a statement of a well settled position in law. Counsel for the Appellant thereafter relied upon a decision of this Court in Inventure Growth Vs. ITAT reported in 324 ITR 319 to submit that in similar facts, this Court set aside the order of the Tribunal. In Inventure Growth and Securities Ltd. (supra) a petition under Artic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts and the decision of the Supreme Court was held to be inapplicable in the factual context existing in that case. However, the decision of the Supreme Court in the matter of Sumati Dayal (supra) would be applicable, when ever there are reasons to believe that the apparent is not real; then the taxing authorities are entitled to look into surrounding circumstances to find out the reality by looking at the surrounding circumstance and applying the test of human probabilities. A reference to the decision in Sumati Dayal s case on a principle of law cannot be said to have caused prejudice to the Appellant. This conclusion is based while proceeding on an assumption that the aforesaid decision of the Supreme Court was not cited and/or referred to during the course of the hearing leading to the order dated 6 April 2010. In view of the above, no substantial question as framed at (i) above arises in the present case. 12. So far as questions No. (ii) to (vii) are concerned, Counsel for the Appellant did not separately address on each question of law but submitted that as the Tribunal was guided by the decision of the Supreme Court in Sumati Dayal (supra) that led to a miscarriage of justi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... breach of the same. We find that the Tribunal has considered the evidence of purchase and sale of shares to book long term and short term losses and taking all the evidence together including the surrounding circumstances reached a finding that the purchase and sale of shares is not genuine. So far as the decision of the Supreme Court in Vodafone International (dated 20 January 2012) is concerned, the Court considered its decisions in the matters of McDowell reported in (1985) 3 SCC 230, Azadi Bachao reported in (2004) 10 SCC 1 and the Mathuram Agarwal reported in (1999) 8 SCC 667 and concluded that where the transaction is not genuine but a colourable device there could be no question of tax planning. The Supreme Court in the aforesaid case after considering the aforesaid two decisions concluded as follows: The majority judgment in McDowell held that tax planning may be legitimate provided it is within the framework of law (para-45). In the latter part of para 45, it held that colourable device cannot be a part of tax planning and it is wrong to encourage the belief that it is honourable to avoid payment of tax by resorting to dubious methods . It is the obligation of every ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is correct in contending that even a single transaction could be in the nature of trade. However, on examination of surrounding circumstances and the parties involved viz. the G.K. Rathi group and its close relationship with the Appellant, it was concluded that the transaction was not genuine. The Tribunal is entitled to look at the surrounding circumstances and to human probabilities to test the evidence led before it. However, while testing the evidence the Tribunal must correctly look at all the evidence and the surrounding circumstances to decide the issue. We find that the Tribunal has considered the fact that for the earlier year Rs.6/- crores was assessed to tax but held that there is no evidence to show that any attempt was made to recover the amounts from Geekay Exim (India) ltd. when in fact evidence was placed before the Tribunal by the Appellant of suits being filed by the Appellant against Geekay Exim (India) Ltd. However what is the nature of suits and for what amounts etc is something which has not been examined. The Tribunal in its order amongst other factors has also taken into account the fact that ever since 1947 when the Appellant company was incorporated it ha ..... X X X X Extracts X X X X X X X X Extracts X X X X
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