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TMI Blog2015 (11) TMI 1219X X X X Extracts X X X X X X X X Extracts X X X X ..... the circumstances, it could not be disputed that the transaction was genuine. It was contended that such transaction were permissible in law and, therefore, the tax effect of such transactions would necessarily follow. It was further contended on behalf of the Assessee that it is permissible for an Assessee to part with its asset with a view to book a loss. In our view, it cannot be disputed that in a case where an Assessee transfers its income producing asset, there could be no objection by the Revenue on the ground that the same had resulted in reducing the tax liability of an Assessee. However, this would not hold good if it is found that the Assessee alongwith its inter-related parties that implemented transactions for no commercial purpose but to create a tax loss while at the same time ensuring that the benefits of the assets remain within the group. This would be an abuse of the corporate form and such transactions, even though implemented, cannot be considered to be other than a colourable device for avoidance of tax. In case the Assessee had actually paid the cum rights price of ₹ 625/- for purchase of the shares, the reduction in value of the shares on an ex-rig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngaged in sale and purchase of shares; it was also assessed on the income earned from business and also claimed deduction on account of business expenses incurred by the Assessee. The shares in question were, concededly, held as stock-in-trade. All that happened in the year in question is that the Assessee sold substantial shares and renounced rights to subscribe to PCDs contrary to its stated intention of holding the same on a long term basis. In view of the above, the income received by the Assessee from sale of shares of JSL and the renunciation of rights to subscribe to the PCDs of JISCO was rightly held by the AO as business income and not income under the head capital gains. As discussed later, the Assessee could not have claimed any business income on account of renunciation of rights to subscribe to the PCDs. - Decided against the Assessee. - ITA 130/2001 - - - Dated:- 19-11-2015 - S. Muralidhar And Vibhu Bakhru, JJ. For the Appellant : Mr. Rohit Madan, Senior Standing counsel with Mr. Zoheb Hossain For the Respondent : Mr. Ajay Vohra, Senior Advocate with Ms. Kavita Jha JUDGMENT Vibhu Bakhru, J 1. This is an appeal filed by the Revenue un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1/2002 and CIT v. M/s Stainless Investment Ltd.: ITA 305/2002 in respect of companies which also belong to the Jindal Group and where similar issues were involved. The learned counsel for the parties argued that the present appeal be considered as a lead matter and a decision in the appeal would also cover the issue involved in M/s Sun Investments Ltd. (supra) and M/s Stainless Investment Ltd. (supra). 6. Briefly stated the relevant facts necessary to address the aforesaid questions are as under:- 6.1 The Assessee is one of the companies belonging to the Jindal Group and was incorporated in the year 1983. The Jindal Group is mainly engaged in manufacturing and production of ferrous metal and alloys. JISCO Jindal Strips Limited (hereafter JSL ) and Saw Pipes Ltd. are among the principal manufacturing companies of the Jindal Group. In addition to the manufacturing concerns, Jindal Group also includes investment companies such as the Assessee which, inter alia, hold shares of the other manufacturing companies. 6.2 It is not disputed that the investment companies within the Group are under an overall common management and that the registered offices of some of the inves ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... PCDs. In terms of the said issue, the Assessee was, inter alia, entitled to subscribe to five PCDs for every four shares held by the Assessee. The PCDs were to be converted to one share of JISCO. The rights issue opened on 14th February, 1992. 6.8 The Assessee renounced its entitlement for subscribing to 1,29,688 PCDs in favour of JSL on 15th February, 1992 i.e. one day after the rights issue opened for subscription. 6.9 The shares of JISCO were quoted at a cum rights price of ₹ 625/- on 3rd January, 1992 and were quoted at ₹ 425/- per share ex rights on 6th January, 1992. 6.10 On the basis of the aforesaid drop in prices, the Assessee claimed that the cost of acquisition of the rights was ₹ 200/- per PCD. The rights to subscribe to PCDs were sold by the Assessee to JSL at a consideration of ₹ 30 per PCD at an aggregate consideration of ₹ 38,90,640/- (1,29,688 PCDs @ 30 per PCD). Thus, the Assessee claimed that it had incurred a loss of ₹ 1,68,59,360/-. This was computed by calculating the dimunition in value of 1,03,750 shares of JISCO - on the basis of which the Assessee acquired the right to subscribe to 1,29,688 PCDs - computed at &# ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appealed before the CIT(A). The CIT(A) rejected the appeals of the Assessee and held that it was amply clear from the behavior of the Assessee that it had entered into collusive transactions alongwith sister concerns and was indulging in such transactions regularly to evade proper payment of tax . The CIT(A) had further held that the principle laid down by the Supreme Court in the case of the McDowell Co. v. CIT: 154 ITR 148 (SC) was fully applicable in the facts of the present case. 6.15 On a further appeal by the Assessee, the ITAT accepted the Assessee s contention and, consequently, the loss claimed by the Assessee on the renunciation of rights to subscribe to PCDs of JISCO was allowed to be set off against the profits made by the Assessee. The ITAT was of the view that the shares of JSL or JISCO held by the Assessee were investments and not trading assets. Consequently, it held that the Assessee was entitled to compute the cost of acquisition of rights to subscribe to PCDs in accordance with the Supreme Court s decision in Dhun Dadabhoy Kapadia (supra). The ITAT further held that the Assessee had sold shares of JSL in order to subscribe to the PCDs of JISCO. It reasoned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ming the loss on renunciation of rights to subscribe to the PCDs of JISCO. He contended that whether the shares in question were held as stock-in-trade or as investments, the Assessee would, in either case, be entitled to claim the loss on renunciation of its rights to subscribe to the PCDs of JISCO. He relied upon the decision of the Bombay High Court in CIT v. K.A. Patch: (1971) 81 ITR 413 (Bom) in support of his contention that the method of calculation of loss on renunciation of rights would remain the same even in a case where the rights in favour of the Assessee result by virtue of shares held as stock-in-trade. 10. Mr Vohra contended that the ratio of the decision in case of Dhun Dadabhoy Kapadia (supra) was squarely applicable to the facts of the present case. He submitted that the transaction for the sale of rights entitlement by the Assessee could not be termed as a sham transaction as the same had been given effect to. He submitted that the rights renunciated by the Assessee in favour of JSL had been exercised by JSL and JSL had subscribed to the PCDs of JISCO which were subsequently issued and registered in the name of JSL. He earnestly argued that in the circumstanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 31st March, 1991 be and are hereby transferred from stock-in-trade to investments in the Balance sheet as at 31-3-1992. 14. The AO held that the actions of the Assessee after 4th April, 1991 did not reflect any change in the intention of the Assessee as the Assessee had effected the maximum amount of sales during the year in question. The AO was of the view that the Assessee s claim that the shares were to be retained as investments was a sham. According to him, the said claim was designed to evade tax due on income from sale of shares of JSL and further claim a loss on renunciation of rights to subscribe to PCDs of JISCO. The Assessee s contention that it was entitled to claim a business loss on account of sale of rights to subscribe to PCDs of JISCO by following the method of computing cost of acquisition as approved by the Supreme Court in Dhun Dadabhoy Kapadia (supra) was also rejected by the AO. The CIT(A) also upheld the decision of the AO. The ITAT noted that there were very few transactions in the shares in question since the incorporation of the Assessee and concluded that the Assessee had held shares in JSL and JISCO in order to maintain control over the companies a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... corded that the shares and debentures valued at cost or market value, whichever is lower as on 31st March 1991 be transferred from stock-in-trade to investments. Thus, it was not the Assessee s case that the said shares be treated as investments from the date they were purchased but were to be retained as investments after the date of the purported resolution. The resolution would have otherwise clearly stated so and the shares would be transferred at cost and not at cost or market value whichever was lower. 17. Thus, the principal issue to be addressed is whether the Assessee intended to retain the shares in question as investments for the previous year 1991-92 relevant to the AY 1992-93 or was the resolution dated 4th April, 1991 only a self serving document to enable the Assessee to claim the profits from sale of shares as Capital Gains. 18. First of all, it is necessary to note that although the resolution dated 4th April, 1991 specifically stated that the shares and debentures of ₹ 82,55,810/- be transferred to investments in the Balance Sheet as on 31st March, 1992; 60,000 shares of JSL were sold in August 1991, that is, within a few months after the passing of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... debentures on a long term basis. The AO thus concluded in our opinion rightly so - that the resolution was a sham and the actions of the Assessee were contrary to the Board resolution produced by the Assessee. 21. Curiously, the ITAT reasoned that the shares of JSL were sold to raise funds to enable the Assessee to subscribe to the rights issue of PCDs of JISCO and held as under: The reasons for selling these shares were that assessee company became entitled to subscription to the convertible debentures of JISCO. Each debenture issued by JISCO was for a sum of ₹ 110/- and an investment in debentures would have involved approximate of ₹ 1.5. Crore and if the assessee company would not have sold its 60,000 shares, then the company has to part away its fixed assets, as the company s total share capital was merely of the sum of ₹ 20 lacs with a back up of reserves and surplus in the sum of ₹ 34.84 lacs. Accordingly the company instead of parting away a substantial portion of its properties sold these shares. Therefore, the intention of the company was clear that the company was interested to buy convertible debentures of JISCO 22. This is palpab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had transferred shares and debentures from stock-in-trade to investment during the year in question is accepted; even then, the Assessee could not claim the gains from sale of shares of JSL as long term capital gains as the shares in question were not held as capital assets prior to 4th March, 1991. 27. Capital asset is defined under Section 2(14) of the Act and the relevant extract of said definition is as under:- (14) [ capital asset means- (a) property of any kind held by an assessee, whether or not connected with his business or profession; (b) any securities held by a Foreign Institutional Investor which has invested in such securities in accordance with the regulations made under the Securities and Exchange Board of India Act, 1992 (15 of 1992), but does not include- (i) any stock-in-trade [other than the securities referred to in sub-clause (b)]], consumable stores or raw materials held for the purposes of his business or profession; xxx 28. Undisputedly, the Assessee had held the shares in question as stockin- trade prior to 4th April, 1991 and had claimed that it had decided to retain the shares and debentures as investments therea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the stock market at a price ranging from ₹ 260 to ₹ 280; yet, the Assessee had sought to transfer the same at a fraction of its market value. Further, the Assessee had also not received the consideration for same within the relevant financial year. Clearly, if the business purpose of the Assessee was to sell one of its assets, it would have done so at the best possible price and terms. However, in the present case, the Assessee had chosen not to do so. In the circumstances, the AO had called upon the Assessee to explain the reason for transferring its rights at below the market price but had received no response to the said query. It is, thus, apparent that the transfer of rights was not for a business purpose. At any rate, the Assessee could not provide any explanation for the same. Importantly, the rights were renounced to JSL which was a related concern. 33. It is also relevant to note that the Assessee had sold shares of JSL and advanced the funds received therefrom to JSL. The ITAT had observed that the shares of JSL were sold to raise funds to subscribe to the rights issued to PCDs of JISCO. However, the Assessee had not subscribed to those shares but had a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onsidering a device to avoid tax, is not to ask whether the provisions should be construed literally or liberally, nor whether the transaction is not unreal and not prohibited by the statute, but whether the transaction is a device to avoid tax, and whether the transaction is such that the judicial process may accord its approval to it . Justice Reddy was of the opinion that it is up to the Court to take stock to determine the nature of new and sophisticated legal devices to avoid tax and expose the same for what they really are and refuse to give judicial benediction . Justice Ranganath Misra speaking for the majority held that tax planning may be legitimate provided it is within the framework of law. Colourable devices cannot be part of tax planning and it is wrong to encourage or entertain the belief that it is honourable to avoid the payment of tax by resorting to dubious method. It is the obligation of every citizen to pay the taxes honestly without resorting to subterfuges . 39. The decision of the Constitution Bench of the Supreme Court in Mcdowell (supra) has been explained by the Supreme Court in its later decisions. In one of the more recent decisions, Vodafone Inter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... missioner of Income Tax v. Sakarlal Balabhai: (1968) 69 ITR 186 (Guj), the Gujarat Court explained the meaning of tax avoidance and observed that Tax avoidance postulates that the assessee is in receipt of amount which is really and in truth his income liable to tax but on which he avoids payment of tax by some artifice or device..... . The Court further explained that such artifice or device may assume diverse forms but there must be some artifice or device enabling the Assessee to avoid payment of tax on what is really and in truth his income . 43. Thus, whilst it is settled that the legitimacy of real transactions cannot be questioned merely for the reason that the same result in mitigating the Assessee s tax liability, the Courts have also held that the colourable devices or subterfuges to evade tax would be impermissible. 44. The Supreme Court in Vodafone International Holdings B.V. (supra), inter alia, considered the issue whether transaction pertaining to sale of shares of a non-resident holding company which resulted in transferring the controlling interest in downstream Indian subsidiary, was a device to evade tax. In that context, the Supreme Court observed that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ad resulted in capital gains in the case of the Assessee the sale of shares of JSL were transferred to other related companies including for the purposes of subscription of the rights renounced by the investment companies. In the case of the Assessee, the sale proceeds of the shares of JSL were loaned to JSL, thus, enabling JSL to subscribe to the rights that were sold by the Assessee at a fraction of its market value. Viewed from the perspective that all companies were related and a part of the Jindal Group, the rights to subscribe to PCDs were not alienated and remained within the Group. The corporate structure of the entities within the group was used for contriving the transactions which would conjure a tax loss in the hands of the companies - including the Assessee - which had incurred a tax liability. 46. In Azadi Bachao Andolan (supra), the Supreme Court had cautioned that the word sham and device are not intended to be used as magic mantras or catchall phrases to defeat or nullify the effect of a legal situation. In Snook vs. London and West Riding Investments Ltd.: (1967) 1 All ER 518 (CA), the Court had held that for acts or documents to be a sham , with wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s explained by the Supreme Court in Vodafone International Holdings B.V. (supra) the question whether a scheme is a colourable or an artificial device would have to be considered in the context of the surrounding facts. In the present case, the facts clearly indicative the transaction to be a part of a scheme, the sole purpose of which is to evade tax payable on the gains made on sale of certain shares of JSL. Several companies within the group have adopted a similar stratagem to avoid tax on the gains made by them. In our view, this stratagem cannot be considered as legitimate and the ITAT erred in not holding so. 49. It is argued that it was also incumbent upon the AO to reduce the sale consideration reflected by the Assessee in its profit and loss account if the AO held the transaction of sale of rights entitlement to be a sham or a colourable device. We are also unable to accept this argument as no such contention was advanced even before the CIT(A) or the ITAT. The Assessee had simply declared profits as per its profit and loss account for charge of tax no claim for rendering the profits had been made and there is no reason for the AO to reduce the same. No alternative argumen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reduce the value of the existing shareholding. The reduction in the value of the shares which was computed at the difference between the cum-right price and ex-right price of TISCO shares was claimed to be the cost of acquisition of the rights and the same was accepted. The contention of the Revenue that the cost of acquisition should be taken as Nil was rejected as the Court held that the Assessee would suffer some loss in the value of her existing shareholding by reason of increase in the issued share capital of TISCO. It was necessary to determine the cost of acquisition of the rights entitlement for the capital gains to be computed. It is also relevant to bear in mind that in a later case, CIT v. B.C. Srinivasa Setty: (1981) 128 ITR 294 (SC), the Supreme Court had held that if a cost of acquisition of an asset could not be determined, the charge of tax would itself fail. 52. The issue that arises for consideration now is whether the aforesaid method of determining the cost of acquisition of rights entitlement could also be applied to cases where the principal shareholding was not held as an investment or a capital asset but as stock-in-trade. The Bombay High Court in K. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... credit in the trading account. The closing stock would be the stock-in-trade in the hands of the Assessee as on the closing date and would typically be valued at market price or cost whichever is lower. The balancing figure between the debit side or credit side of the leading account would reflect the gross profit or loss. The gross profit would be further reduced by other expenses incurred by the trader to arrive at his net profit or loss. In the case of shares held as stock-in- trade, the consideration for sale of rights entitlement would indisputably be a trading receipt which would be credited to the trading account. The cost incurred by the Assessee would be naturally subsumed in the value of the closing stock, assuming that the shares on the basis of which rights entitlement has been granted to an Assessee are still retained by him at the end of the closing period. In the present case, the Assessee has, admittedly, credited the income from sale of rights entitlement in the Profit and Loss Account. Undisputedly, all costs incurred by the Assessee as well as the value of closing stock have also been taken into account by the Assessee. Although the Assessee has sought to transf ..... X X X X Extracts X X X X X X X X Extracts X X X X
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