9911796707
TMI Blog2003 (4) TMI 578X X X X Extracts X X X X X X X X Extracts X X X X ..... to the disallowance of interest of ₹ 1,74,12,682. The AO observed that the assessee-company has not given out any new finances during the accounting year relevant to assessment year under consideration. However, the company has increased its investments as compared to the earlier assessment years. The AO further noticed from the balance sheet of the company that it has a share capital of ₹ 5,37,50,000 unsecured loans of ₹ 1,30,00,000 and reserves and surplus of ₹ 1,09,77,650. As against this total amount of ₹ 7,77,23,650, the assessee-company has invested ₹ 90,96,60,103 in the share of group companies. Thus, according to the AO, the entire fund available with the company has been mainly invested in the shares of the group companies and group partnership firms only. The AO has also referred to the P&L a/c of the assessee firm and has stated that the assessee is having income from dividend on long-term investments of ₹ 71,19,180 which has been taxed as income from other sources and profit on sale of long-term investments of ₹ 17,06,579 which has been taxed as capital gains. Thus, according to the AO, this income does not include any bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is carrying on the business with itself, which is not business at all. 4. During the course of assessment proceedings, the assessee-company explained that the assessee-company borrowed money and paid interest on such borrowings, therefore, such interest paid is eligible for deduction under s. 36(1)(iii). According to the assessee, the money has been borrowed, the same has been borrowed for the purpose of business of the assessee. The third condition laid down in s. 36(1)(iii) is also satisfied because the interest has been paid and the same has been claimed as deduction. But according to the AO, the assessee has not fulfilled the main condition that "it must have been borrowed for the purpose of the business". The AO, therefore, came to the conclusion that the assessee-company was not carrying on any business activity and therefore, it cannot be said that the various amounts invested in the shares of group concerns are advances out of the funds borrowed for the purpose of business. The AO also referred to the decisions of the Gujarat High Court in the case of Sarabhai Sons (P) Ltd. vs. CIT (1993) 110 CTR (Guj) 305: (1993) 201 ITR 464(Guj), wherein the High Court has hel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an be deducted and there is no scope for deduction of interest in the instant case, as there is no business income taxed or taxable to which it relates". The learned CIT(A) also referred to the statement of total income of the assessee especially to the expenditure claimed and has stated that the expenditure incurred pertains only to purchases and sales of shares and dividend income. Thus, according to him, there is no business income or loss as such; that can be computed under s. 28 of the Act, therefore, the interest under s. 36(1)(iii) or 37(1) cannot be allowed. He has further stated that the interest under s. 57(iii) also cannot be allowed because the dividend income is exempt. The learned CIT(A) has also justified the action of the AO for assuming that the assessee had earned profit from itself by stating that the AO has implied the principle of piercing the veil of corporate personality where interlaced transactions between group companies produce reduction of tax liability. In this connection, he has referred to various decisions of the Supreme Court on this subject. According to him, the accounts of the assessee-company indicate that the company had acted as a mere co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce of the business. He further argued that it is not understandable why the other expenses incurred during the course of business like interest income should not also be allowed as business expenses on the background of non-existence of business. The learned counsel further argued that in the alternative, even if the contention of the AO about non-existence of business during the year be accepted, still expenditure incurred by the assessee will have to be allowed as deductions. He placed his reliance on the following Court cases : (i) General Corporation Ltd. vs. CIT (1935) 3 ITR 350(Mad) (ii) CIT vs. Bharat Nidhi Ltd. (1966) 60 ITR 520(P&H) (iii) Hindustan Chemicals Works Ltd. vs. CIT (1980) 124 ITR 561(Bom) 7. Regarding the remarks of the AO that the interest is not allowable on funds borrowed for the purpose of long-term investments and not for sale, the learned counsel invited our attention to the detailed discussion made by Chaturvedi and Pithasaria at p. 1980 for their Treatise of Income-tax Law (5th Edn., Vol. II) discussing the legal principle that there is no difference in the utilisation of borrowing for the acquisition of a capital asset or revenue asset. So far ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome will not be allowable. In this connection, the learned counsel argued that the assessee-company carried on the business as an investment and finance company. Ample activities were undertaken in the process of carrying on such business. The expenses have also been claimed not against any particular income like dividend, etc. but on the entire background of the assessee being engaged in the business activities as an investment and finance company. No exact business income might have been generated during the year but that has not prevented the Department from allowing other business expenses. The learned counsel contended that the main activity of the assessee is to purchase shares of various companies mostly for the purposes of acquiring controlling interest therein in conjunction with other group companies. That is why the shares acquired by the assessee-company have been shown under investment portfolio and not as stock-in-trade. He referred to the decision of Gujarat High Court in the case of Addl. CIT vs. Laxmi Agents (P) Ltd. (1980) 125 ITR 227(Guj), wherein the High Court held that interest paid by the responded company on the amounts borrowed for purchasing shares of it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the interest as business expense is not accepted, then reference may be made to the order of the learned CIT(A) dealing with the details of the claim of the interest payment under consideration. He found out that the said claim consisted of an amount of ₹ 162.82 lakhs to M/s Mafatlal Industries Ltd. (MIL) and ₹ 11.30 lakhs to M/s Sushmita Holdings Ltd. (SHL). So far as the main amount of ₹ 162.82 lakhs is concerned, the CIT(A) found out that the said interest payment was made to M/s Mafatlal Industries Ltd. on ₹ 15,81,00,000 @ 21 per cent for the period from 1st April, 1997 to 27th Sept., 1997. Thus according to the learned counsel, the CIT(A) himself admits, thereafter, that the liabilities towards interest payment arose mainly out of share transfer between the group companies passed through journal and ledger entries. The learned counsel has stated that in the details of long-term/short-term capital gain on sale of shares of Gujarat Gas Company Ltd. (GGCL) filed along with the returns of the income for this year was shown that total number of 16,82,500 shares of GGCL were sold by the assessee-company during the year under consideration and that is how th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he learned Departmental Representative also referred to the decision of the Madras High Court in the case of Ace Investments (P) Ltd. vs. CIT (1999) 157 CTR (Mad) 185: (2000) 244 ITR 166(Mad), wherein the Hon'ble High Court has laid down that the mere presence of the object clause would not be sufficient to hold that the assessee was carrying on moneylending business. The learned Departmental Representative argued that the company did not arrange new finances during the previous year relevant to the assessment year under consideration. The assessee-company has sold one of its old shares held as long-term investment in the books of account. There was no operational income during the relevant previous year. Thus, according to him, the assessee was not carrying on any business activity during the previous year relevant to the assessment year under consideration. The learned Departmental Representative contended that the various circumstances have to be taken into consideration for allowing the expenditure. He referred to p. 7 of the CIT(A)'s order and contended that when there is no computation of business income or loss under s. 28 of the Act, no deduction can be allowed unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case of Challapali Sugars Ltd. vs. CIT 1974 CTR (SC) 309: (1975) 98 ITR 167(SC), wherein the apex Court has held that interest paid on the loan on the unpaid purchase price upto the date of commencement of production where a plant is constructed out of borrowed money or where part of the purchase price of the plant remains unpaid forms part of the cost. In reply, the learned counsel contended that the Court cases relied upon by the learned Departmental Representative are not relevant to the facts of the present case. The learned counsel contended that the assessee is an investment company and has made various investments. Therefore, the money has been borrowed for the purpose of the business. He also argued that the interest was allowed in the asst. yr. 1995-96. He also placed his reliance on the written submission filed during the course of hearing. 13. We have carefully considered the submissions made by the rival parties. We have also gone through the written submission filed by the learned counsel. The assessee-company paid interest of ₹ 1,74,12,687 on its borrowings during the assessment year under consideration. The assessee made the claim that the interest payment was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (i) the money (capital) must have been borrowed by the assessee; (ii) it must have been borrowed by the assessee for his business, profession or vocation; and (iii) the assessee must have been paid interest on the amount and claimed it as an allowance. The language used in cl. (iii) of s. 36(1) is the amount of the interest paid in respect of capital borrowed for the purposes of the business or profession. It has been held by the Courts that the expression "for the purpose of the business" is wider in scope than the expression for the purpose of earning profits. It has been laid down in the following Court cases that it is not necessary that the business may be carried on in the year in which the capital was borrowed. It is sufficient that the money was utilised for the purpose of acquisition of capital asset : (i) Calico Dyeing & Printing Works vs. CIT (1958) 34 ITR 265(Bom) (ii) C.T. Desai vs. CIT (1979) 12 CTR (Kar) 320: (1979) 120 ITR 240(Kar) (iii) CIT vs. Insotex (P) Ltd. (1984) 39 CTR (Kar) 172: (1984) 150 ITR 195(Kar) It has been held by the Hon'ble Bombay High Court in the case of Calico Dyeing & Printing Works (supra) that it is not necessary w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to disallow such expenses. The learned counsel has rightly pointed out that these were also business expenses and if the business of the assessee was not in existence as has been held by both the authorities, these expenses were also not allowable. By allowing these business expenses, the Department, in fact, has accepted that the business of the assessee was in existence during the year under consideration. The payment of interest is also part of the business expenditure incurred by the assessee during the assessment year under consideration. The Department is not empowered by law to indulge in the practice of allowing a part of the expenditure on the basis that business was in existence and disallowing the remaining expenditure on the basis that business was not in existence. These findings of the authorities are contradictory and bad in law. We also find substance in the arguments of the learned counsel that the expenditure incurred by the assessee will have to be allowed as deduction even if the business was in dormant condition during the relevant assessment year. The contention of the learned counsel is fully supported with the Court cases relied upon by him. The contention o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or of any other law in the course of transactions undertaken by the assessee-company as well as its other group companies/associate firms. The learned CIT(A) has referred to the lifting of veil without bringing any evidence on record to prove that the group companies have actually indulged in the device of evasion of tax by rotating the funds/shares, etc., within themselves. There is nothing on record to prove that the group companies have indulged in the practice of evasion of tax by adopting illegal means. The onus is on the Department before lifting the veil to support their case with illegal practices in which the group companies are indulging to defraud the Revenue. The remarks of the learned CIT(A) are irrelevant as such remarks are not based on any material on record. The learned CIT(A) has raised another issue regarding the dividend income which is being exempt in the hands of the assessee-company. According to him, no taxable income arose out of the business activity during the year, therefore, any expense incurred for earning dividend income will not be allowable. These findings of the learned CIT(A) are also not supported by any material on record. The assessee-company i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany declares dividend in favour of its shareholder, the dividend amount declared becomes income receivable by the shareholder. Thus, if tax is paid out of such dividend declared whether by shareholder directly or by the company in an indirect manner, it is the dividend income which has suffered tax. In fact, dividend declared by the company is the income of the shareholder. Before the existing provisions of s. 115-O, the dividend income was taxable in the hands of the shareholders. Now as per the provisions of s. 115-O the tax is being deducted by the company out of dividend declared, distributed or paid to the shareholder. Thus, the dividend income, which belongs to the shareholder has suffered tax either in the hands of the company or in the hands of the shareholder. The shareholder has received the net income in both the cases. For example, if the total dividend declared by the assessee-company is ₹ 1,000 and the tax paid by the shareholder on this amount is @ 10 per cent then the net income remains in the hands of the shareholder is ₹ 900 only. But as per the provisions of s. 115-O, if the company is deducting tax @ 10 per cent out of the dividend declared of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her circumstances as stated above which proved undoubtedly that the assessee-company was an investment company. Therefore, the above Supreme Court decision has moreover supported the case of the assessee-company that the company was actually dealing in the business of investment in shares. In the case of Challapalli Sugars Ltd. (supra), the Hon'ble Supreme Court laid down that, if the interest paid on the amount borrowed for acquiring and installing machinery and plant for a period prior to commencement of production, the same would actually form part of the actual cost of machinery and plant. In the present case as we have discussed above in detail, the assessee-company carried on the business as a investment company during the year under consideration. The assessee-company had carried on the activities of the nature of purchase and sale of shares, had earned dividend income and had also incurred various business expenditure like legal and professional expenses, staff expenses, stamp expenses, bank charges, etc., which have also been allowed by the AO. Therefore, the interest expenditure incurred by the assessee is also allowable under the provisions of s. 36(1)(iii) as the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding assets. But in the present case, the main business of the assessee was investment in shares. The assessee-company carried on the activities in respect of all the ingredients of an investment and finance company. Therefore, the main business of the assessee was to deal in investments and hence, the dividend income earned by the assessee was income from the main business carried on during the relevant assessment year. The facts of the abovesaid case are not relevant to the facts of the present case because in the abovesaid case the assessee was earning the dividend income from its investment in shares, which was not the part of the business income of the assessee. In the case of Rajendra Prasad Moody (supra), the Hon'ble Supreme Court held that the interest on monies borrowed for investment in shares which had not yielded any dividend was admissible as deduction under s. 57(iii) of the IT Act, 1961 in computing its income from dividend under the head "income from other sources". We do not find any relevance of this case to the facts of the present case. In the present case, the question of deduction under s. 57(iii) of the Act does not arise because in the present ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ital gain has arisen which is of ₹ 14,70,11,801. The AO has also stated that the assessee-company has sold shares totalling to 6,16,530 on 30th July, 1997 to a partnership concern namely M/s Arvi Associates @ ₹ 24.50 per share. Subsequently on 24th July, 1997, the assessee-company has purchased shares numbering to 2,28,00,000 from its group companies @ ₹ 43.01 per share. On 24th Aug., 1997, the assessee-company has sold 98,00,000 shares to its partnership firm, M/s Arvi Associates, @ 27.50 per share. 21. The AO found that the assessee-company had not received any sale consideration of the shares sold to the partnership firm M/s Arvi Associates. As per the partnership deed dt. 12th Oct., 1995, the original partners of M/s Arvi Associates were Sushripada Investment (P) Ltd. and Suvin Trexchem (P) Ltd., both are group companies of Mafatlal Group. Subsequently, vide deed of partnership dt. 1st July, 1997, two new partners which are also group companies of Mafatlal Group were admitted, i.e., Mafatlal Holding Ltd. and Mafatlal Finance Co. Ltd. The AO noticed that deed of partnership dt. 1st July, 1997 was not registered with the Registrar of Firms. Therefore, this is a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i Associates as a consideration towards the capital contribution of the assessee-company, therefore, it was not required for the assessee-company to receive the sale consideration of the shares. The AO, however, did not accept the contention of the assessee and had stated that as per the balance sheet of Arvi Associates as on 31st March, 1998, the capital amount shown against Mafatlal Holding Ltd. under the heading "partners capital account" was ₹ 5,000 only. Thus, according to the AO, the amount of capital alleged to have been introduced through the sale of shares had not been shown in the balance sheet of the firm. The AO further observed from the balance sheet of the assessee firm that the investment made by the assessee-company in the partnership firm was only ₹ 5,000. The AO has thus, stated that the contention of the assessee-company that the sale consideration of NOCIL shares to Arvi Associates was not received on the ground that the same were introduced as capital was not found correct. The AO further noticed that in the balance sheet as on 31st March, 1998 of the assessee-company under Sch. VI, under the heading "loans and advances" the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... NOCIL, the outside parties would have competed fiercely for these bulk of shares and would have paid much more as it would have enabled the decided purchasing party to have a control over the management of the group company. Thus, according to the AO, the assessee never intended to sell the subject shares but merely wanted to claim the benefit of loss arising to it on a technical ground due to change of ownership of shares on paper. The AO has thus, finally concluded that the alleged share transaction of the assessee-company is nothing but a bogus and sham transaction. According to him, it is a paper transaction carried out between the group companies of the Mafatlal group and the assessee has the role play of a conduit in the channelisation of funds of the group companies. Hence, the loss claimed on account of sale of 1,34,16,530 shares of NOCIL amounting to ₹ 21,33,53,989 is disallowed by him. 25. The learned CIT(A) in his order has observed that the entire lot of 1,04,16,530 shares were not in the possession of the assessee, because they had been pledged with finance companies and banks for a loan to Mafatlal Industries Ltd. According to him, the details regarding the pl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Feb., 1952, was liable to be included in its income and taxed for the asst. yr. 1953-54." 26. According to the learned CIT(A), the original share certificates were not produced before the AO on the plea that they were pledged. But at least, the assessee could have given the identifying certificate numbers of those huge lot of shares. It is further stated that the assessee also did not give any information regarding the date of pledging. The assessee also did not file any information whether the pawnee was informed about the sale and whether its consent was taken for the sale. According to the learned CIT(A), it was not taken and precisely for this reason; it has been claimed that no valid transfer deed was executed and handed over to the purchaser along with the shares. The learned CIT(A) also made reference to s. 82 of the Companies Act which reads as under : "Sec. 82. Nature of shares.'The shares or other interest of any member in a company shall be moveable property, transferable in the manner provided by the articles of the company." Thus according to the learned CIT(A), the transfer of shares in a company has to conform to the provisions of the Companie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s (ii) Mishapur Investments (a) Beneficial owner Shripad Associates 30,00,000 shares (b) Beneficial owner Shripad Associates 35,00,000 shares (iii) Mishapur Investments (a) Beneficial Owner Arvi 30,00,000 shares (b) Beneficial Owner Arvi 98,00,000 shares Total 3,00,87,320 shares According to the learned CIT(A), the same break up has been given by Shri Arvind Mafatlal by his letter dt. 13th April, 1998 addressed to NOCIL wherein, he has stated that along with others hold 5,32,98,700 equity shares of NOCIL, equivalent to 43.47 per cent of the paid up capital of NOCIL. The CIT(A), therefore, came to the conclusion that in reality, no share transfer has taken place, insofar as NOCIL is concerned up to 31st March, 1998, in respect of 98,00,000 shares allegedly sold first by Mishapur to the assessee and then again by the assessee to Arvi within a month. It is further stated by the CIT(A) that it is obvious that another group company has sold 30,00,000 shares to Arvi after buying it from Mishapur and, again, one or more other companies of this group have bought 30 and 35 lakhs shares from Mishapur and sold it to Shripad Associates. The CIT(A) has also referred to the agreemen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee has claimed that it is a sale, but in order to explain why no consideration was received, it is claiming that it is a capital contribution. He has also mentioned that in the assessee's own audited accounts, it is advance outstanding against Arvi and the capital invested in Arvi is only ₹ 5,000. According to him, Arvi itself has confirmed that it purchased the shares from the assessee, and it has not shown the sale price as capital of the assessee, but an investment in its books. Thus, the learned CIT(A) considered the contention of the assessee as untenable and rejected the same. He has further stated that this issue is infructuous in view of the fact that the alleged sale itself has been held as sham. He, therefore, confirmed the disallowance of the said loss and dismissed the grounds of appeal of the assessee pertaining to this issue. 30. At the time of hearing, the learned counsel for the assessee took us first through the purchases and sales of shares of the assessee-company, which are as follows : Purchases (i) In the year 1993-94 4,69,600 shares In the year 1994-95 1,46,930 shares (ii) Opening stock for the year in appeal 6,16,530 shares (iii) On 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... learned counsel contended that not only proper application was made by M/s Arvi Associates for its registration but that receipt of such application which is still pending for disposal was also acknowledged by the Registrar of Firms (compilation p. 138). The learned counsel, therefore, argued that so far as M/s Arvi Associates is concerned, it made sincere efforts to get itself registered as a partnership firm with the Registrar of Firms. He contended that whether M/s Arvi Associates is registered with the Registrar of Firms or not is of little consequence with regard to the issue of sale of shares to that concern. According to him, under the IT Act, there is no distinction between a firm which is registered with the Registrar of Firms and another which is not so. It is also not mandatory for the existence of a partnership firm to get itself registered with the Registrar of Firms and the genuineness of the partnership firm under the IT Act cannot be challenged simply on the ground that it is not registered with the Registrar of Firms. 32. Regarding the payment of sale of shares by M/s Arvi Associates to the assessee-company, the learned counsel argued that no cash money was paid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the assessee-company on the outstanding balance. The learned counsel argued that the AO himself has acknowledged at p. 18 of the assessment order that the transaction should be of the nature of a sale consideration. The learned counsel contended that the assessee has relied on the provisions of s. 45(3) of the Act and according to which the profits and gains arising from the transaction of a capital asset by a partner with a firm by way of capital contribution or otherwise shall be taxable in the year of transfer and the amount recorded in the books of account of the firm as the value of the capital asset shall be deemed to be the full value of the consideration as a result of transfer of the capital asset. The learned counsel, therefore, contended that the transaction under consideration cannot be considered to be a capital contribution at the time of inception of the firm. At the same time again, this is certainly a case of transfer of capital asset by the assessee-company being a partner to Arvi Associates, the firm. He argued that since in the books of the firm, the value of the capital assets has been recorded at the amounts at which it is shown to have been sold in accord ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , while the shares have duly been transferred to the transferee. So far as the involvement of share broker is concerned, the learned counsel argued that since the transaction was one between independent parties and had not been carried out in a recognised stock exchange it was not necessary that the dealing in shares should be through any registered broker of the stock exchange. The learned counsel referred to the provisions of s. 108 of the Companies Act which provides that the shares of listed companies shall be freely transferable and hence it was not necessary that the transactions under consideration should have been carried through a recognised stock exchange or broker. Regarding the pledging of shares by M/s Mafatlal Industries, the learned counsel argued that the shares had already been pledged on behalf of M/s Mafatlal Industries Ltd. who had obtained loans against the above shares. The learned counsel contended that there is nothing wrong in the sale of pledged articles. The transaction of sale will be subject to pledge. He pointed out that even in case of immovable properties also, properties in mortgaged condition are saleable and the law does not prohibit such sales. S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... confirmed by the transferee, necessary accounting entries had duly been given effect to in the books of both the assessee-company as well as the transferee and furthermore the fact that the transferee had become a beneficial owner of the shares had been reported to the Government and also to the stock exchanges. The learned counsel brought to our notice that in this connection, the following evidences furnished under the letter of the assessee-company dt. 28th March, 2001, were produced before the lower authorities. (i) A copy of letter dt. 13th April, 1998, issued by Shri A.N. Mafatlal addressed to NOCIL under regn. 8 of the SEBI Regulations. In the statement annexed to the letter dt. 13th April, 1998 (at pp. 1 and 2 of the additional paper book) Sl. Nos. 31 and 32 clearly show M/s Arvi Associates to be the beneficial owner of 98 lakhs shares and 6,16,530 shares, respectively of NOCIL. (ii) A letter dt. 17th June, 1998 issued by NOCIL addressed to the Stock Exchange, Mumbai and other stock exchanges under regn. 6 of the SEBI taken over regulation. In the list of details of share holding annexed with the letter dt. 17th June, 1998 (at pp. 3 to 6 of the additional paper book), t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... decide the issue under consideration. According to the learned counsel, the CIT(A) got confused between the formalities under the Companies Act relating to registration of transfer of shares in the event of such transfer with the transfer process itself. So far as the transfer of shares is concerned, the same is guided solely by the provisions of Sale of Goods Act, 1930, and the Companies Act merely provides for the mechanism in which such shares already transferred in the eyes of law, will be mutated in the books of the company. The process is similar to the question of mutation of the name of the transferee in place of the vendor in the books of municipal authorities in respect of immovable properties. The mutation of name in the books of the municipal authorities may take long-time but once the property is transferred by following the requirements of the Transfer of Properties Act, 1982 read with the relevant section of Registration Act, the genuineness of the transfer itself cannot be challenged even though the transferor may still be shown as the owner of the property in the books of the municipal authorities. Thus, the learned counsel has contended that the arguments of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ems to be prepared to accept that, on the date of the sale, the shares were liable to be sold at a price at which they have actually been sold. He has further argued that the various issues raised by the tax authorities are merely peripheral in nature and may at best raise some points of suspicion. The learned counsel referred to the decision of the Supreme Court in the case of Dhakeshwari Cotton Mills Ltd. vs. CIT (1954) 26 ITR 775(SC) wherein Hon'ble Supreme Court has laid down that a surmise based on suspicion cannot take the place of documentary evidences on record and an addition cannot be made simply on the basis of surmises neglecting the evidences on record and contended that in the present case, the lower authorities have chosen to ignore the documentary evidences and have proceeded merely on the basis of suspicion, surmise and conjecture. 37. The learned Departmental Representative referred to the provisions of s. 45(3) of the Act. According to him, this provision was brought on the statute book only in 1987 to bring to tax capital gains on transfer of firms, assets to partners and vice versa. The learned Departmental Representative referred to Circular No. 495, dt. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entative also referred to p. 16 of the AO's order and contended that the assessee-company introduced only ₹ 5,000 in the partnership firm, Arvi Associates, and the firm has treated this amount as advance. Therefore, according to the learned Departmental Representative, it was not capital contribution as the same has been shown under the heading "loans and advances". The learned Departmental Representative also made reference to p. 17 of the AO's order and argued that M/s Arvi Associates had stated that they had purchased 1,04,16,530 equity shares of NOCIL from the assessee-company. The learned Departmental Representative, therefore, contended that there was no introduction of the capital by the assessee-company in Arvi Associates. The learned Departmental Representative, also supported the findings of the AO that the assessee-company did not receive any payment for the sale of shares. The assessee-company also did not produce the original shares for examination. Therefore, according to him, the transaction was not genuine. He further argued that the shares are still in the name of Mafatlal Industries Ltd. He contended that the assessee-company also did not f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of s. 5 of Sale of Goods Act and contended that the sale becomes final only when there is a transfer of property. In the present case, the property has not been transferred. Moreover, the shares were not in the name of the assessee-company, therefore, the assessee-company did not have the right to sell. He also contended that the sale would be valid only if the goods were in the possession of the assessee. In the present case, the shares were pledged with financial institutions and banks, therefore, such pledged shares cannot be sold because share cannot be passed on to the buyer. 41. The learned Departmental Representative argued that the sale of shares has to be made as per the Companies Act. He made reference to p. 32 of the CIT(A)'s order and contended that no valid transfer deed was executed and handed over to the purchaser along with the shares. He further made reference to p. 30 of the CIT(A)'s order and contended that one can sell what one owns, not through book entries, but by following the procedure prescribed for the transfer of shares in the Companies Act. According to him, in the present case, since it has been admitted that no valid transfer deed was execut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ement of share holding which is given as follows : Name of the Holder No. of shares held Percentage (beneficial owner Arvi Associates) 30,00,000 2.45 (beneficial owner Arvi Associates) 98,00,000 8.00 (beneficial owner Arvi Associates) 6,16,530 0.50 The learned counsel, therefore, contended that Arvi Associates were beneficial owner of 98,00,000 shares of NOCIL and this information was in connection with continual disclosure of share holding and control in a listed company as on 31st March, 1998, as required by regn. 8 of Securities and Exchange Board of India Regulations, 1997. Thus, the learned counsel contended that the information regarding the share holding was filed with SEBI from time to time. The learned counsel also brought to our notice that Stock Exchange, Mumbai was also informed vide letter dt. 17th June, 1998, of NOCIL regarding the share holding of Arvi Associates (compilation pp. 3 and 4 of second compilation). Therefore, the learned counsel contended that the endorsement of the views of the tax authorities by the learned Departmental Representative is not correct. The learned counsel also contended that the statement of the learned Departmental Represen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he loss of ₹ 21,33,53,989 claimed by the assessee-company on the basis that the assessee was not owning the shares which it has transferred to the firm M/s Arvi Associates. Thus, according to the Department the transfer of shares was not valid and the assessee-company is not entitled to benefit of s. 45(3) of the Act. On the other hand, the assessee-company submitted that the transfer of NOCIL shares to the firm Arvi Associates was as per the provision of law, therefore, the assessee-company is entitled to the benefit of s. 45(3) of the Act. 44. The AO has challenged the genuineness of the sale transactions of the shares under consideration for various reasons. The first reason is regarding the registration of the firm, M/s Arvi Associates, with the Registrar of Firms. In the case of Dulichand Laxminarayan vs. CIT (1956) 29 ITR 535(SC), the Hon'ble Supreme Court held that s. 4 of the Indian Partnership Act, 1932, clearly requires the presence of three elements to constitute a firm namely (i) that there must be an agreement entered into by two or more persons; (ii) that the agreement must be to share profits of business; and (iii) that the business must be carried on by a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ement under any law relating to sale of goods or even of immovable property that the purchase consideration has necessarily got to be paid in cash. The meaning of word "paid" has been defined in s. 43(2) of the Act as follows : "The word 'paid' is defined to mean the amounts actually paid or incurred according to the method of accounting followed by the assessee, for the purpose of computing profits or gains under the head 'profit or gains of business or profession'." In the present case, the assessee is following mercantile system of accounting, and hence crediting the account of the assessee in the books of the firm and debiting the account of the firm in the books of the assessee is sufficient for the purpose of actual payments towards sale of the shares to the firm. The learned counsel has also rightly pointed out that there is no requirement under the law that in case of transfer of an asset by a partner to the firm in which he is a partner, the amount of sale consideration has got to be credited to his capital account. Sub-s. (3) of s. 45 provides when a "capital asset" owned by the person, is introduced as the said person' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s at which it is shown to have been sold, in accordance with the provisions of s. 45(3) for the purpose of computation of capital gains/loss on the transaction. The aforesaid amount recorded in the books of account of the firm have to be considered to be the full value of the consideration of the shares transferred. 46. The genuineness of the sale transactions of the shares is also challenged by the Department on the basis that the shares under consideration have not been transferred in the name of M/s Arvi Associates and they still continue to be either in the name of assessee-company or M/s Mishapur Investment Ltd. In this connection, the learned counsel explained that the shares purchased by the assessee-company from M/s Mishapur Investments Ltd. and sold to M/s Arvi Associatees stood pledged with the bank and financial institutions by M/s Mafatlal Industries Ltd., therefore, the shares could not be transferred either to the assessee-company or to M/s Arvi Associates. We find force in the arguments of the learned counsel that M/s Arvi Associates being a partnership firm is not capable of holding any shares in its name and that is why as per the business practice, part of the sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lso without any basis. The transaction of sale of shares was between two independent parties and had not been carried out in a recognised stock exchange as it was not necessary that dealing in shares should be through any recognised broker of stock exchange. The learned counsel rightly invited our attention to the provisions of s. 108 of the Companies Act which provide that the shares of listed company shall be freely transferable hence it was not necessary that the transactions under consideration should have been carried through a recognised stock exchange or broker. The learned Departmental Representative could not produce any evidence before us to contradict the arguments of the learned counsel. The Department has also not supported the findings of the AO and the learned CIT(A) with any material on record or any Court case wherein it has been stated that the transactions of shares of a listed company should be through a broker of a stock exchange or such transactions should be carried out only in a recognised stock exchange. In our opinion, it is not a mandatory condition that the transactions of sale of shares between independent parties should be carried out in recognised sto ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tutions with whom the shares have been pledged by resorting to the provisions of s. 131 of the Act for producing such documents. The approach of the Department in this connection appears to be quite casual. Under the circumstances, the Department has not brought any evidence on record to prove that the transaction of sale of shares is not genuine. 49. The learned CIT(A) referred to the provisions of Companies Act and has contended that the transactions were not genuine in shares because the transfer deeds were not executed in respect of the shares sold by the assessee-company. In this connection, we would like to refer to some of the provisions of Sale of Goods Act. Sec. 2(4) of the Sale of Goods Act, 1930, pertaining to definitions reads as follows : "Document of title of goods includes a bill of lading, dock-warrant, warehouse keeper's certificate, wharfingers' certificate, railway receipt, warrant or order for the delivery of goods and any other document used in the ordinary course of business as proof of the possession or control of goods, or authorising or purporting to authorise, either by endorsement or by delivery the possessor of the document to transfer or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aforesaid Sale of Goods Act reads as under : "Subject to the provisions of any law for the time being in force a contract of sale may be made in writing or by word of mouth, or partly in writing and partly by word of mouth or may be implied from the conduct of the parties." Thus, in view of the above provisions of Sale of Goods Act, even an oral contract would also suffice for the purpose of sale of shares. In the present case, the transactions have been confirmed by the transferee and necessary accounting entries had duly been given effect to in the books of both the assessee-company as well as the transferee. Moreover, the transferee had become a beneficial owner of the shares and this fact had been reported to the Government and also to the stock exchanges. The evidence regarding this was also filed before the tax authorities (supra). In addition to the formalities of transfer of the shares, between the assessee-company and the purchaser and also the entries in their respective books of account, even the company concerned, i.e. NOCIL, and SEBI also took note of the beneficial ownership in the shares under consideration. Thus, the shares have been transferred to M/s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e doubted. Therefore, the shares of NOCIL owned by the assessee were in a deliverable state. Therefore, in the present case, there was an unconditional contract for sale of specific shares, which were in deliverable state, therefore, the shares as per the provisions of s. 20 of Sale of Goods Act, 1930, were passed on to M/s Arvi Associates as soon as there was contract between the assessee-company and M/s Arvi Associates. The shares remained no longer of the ownership of Mafatlal Holdings Ltd. Dividend on the shares after the sale transaction has been passed on to M/s Arvi Associates, thus confirming the fact of sale. Therefore, the reference to the above said provisions of the Sale of Goods Act by the learned Departmental Representative is not relevant to support the case of the Department, moreover, these provisions support the contention of the learned counsel. 52. We also find substance in the arguments of the learned counsel that the transfer of shares is guided solely by the provisions of Sale of Goods Act, 1930, and the Companies Act merely provides for the mechanism in which such shares already transferred in the eyes of law will be mutated in the books of the company. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Department has not produced any evidence to support their case. The Department has also not contradicted the contention of the learned counsel that the shares were transferred by the assessee-company at the prevailing market rate on the relevant date. The opinion expressed by the Departmental authorities cannot be considered unless they are based on some evidence. The assessee-company has furnished documentary evidence in support of the genuineness of the sale transactions. It was also brought to our notice that the Department has accepted the purchase of the shares in similar conditions of remaining shares pledged by M/s Mafatlal Industries Ltd. as genuine. Therefore, the Department cannot indulge in double standards to call the sale of shares in the same condition to be bogus. There is nothing wrong in carrying on the transactions of shares between the members of the group provided all legal requirements are complied with. The Department has not brought any evidence on record to prove that any of such legal requirements was lacking in the present case. The Department, in fact, has accepted that on the date of sale of the shares, the assessee-company has actually sold the shares ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s capital asset to the firm, the capital gain tax will not be leviable since the value of the consideration is not ascertainable. The new sub-s. (3) of s. 45 has statutorily superseded to the effect of the said judgment. Therefore, the ratio of the above judgment and similar other judgments would apply only up to asst. yr. 1987-88. Under the circumstances, the above judgment is not relevant to the facts of the present case, as the assessment year under consideration is 1998-99. The Calcutta High Court decision in the case of Sumitra Devi Jalan (supra) pertains to wealth-tax. The assessee had acquired shares of a company but transfer of the shares had not been registered in the name of the assessee in the share register. The Hon'ble Calcutta High Court held that pending registration of the shares in the books of the company, the shares could not be considered to be belonging to the assessee. Therefore, this decision was under the wealth-tax and main question before the Hon'ble Court was to decide about the ownership of the shares, i.e., whether the shares could be considered to be belonging to the assessee or not. The Court held that the rights conferred on the transferee by ..... X X X X Extracts X X X X X X X X Extracts X X X X
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