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TMI Blog2017 (5) TMI 917X X X X Extracts X X X X X X X X Extracts X X X X ..... ainst Rs. 12,4267-added by the Appellant Company itself while filing the return of income. 2. That the order dated 28-02-2013 passed u/s 250 of the Income Tax Act, 1961 by the Learned Commissioner of Income-Tax (Appeals) XII, New Delhi is against law and facts on the file in as much as she was not justified to uphold the action of the Learned Deputy Commissioner of Income Tax, Ward 9(1), New Delhi in disallowing a sum of Rs. 4,88,90,050/- claimed by the Appellant Company as a short term capital loss" 2. The first ground of appeal is against the disallowance of Rs. 440663/- on account of expenses incurred for earning tax free income u/s 14A of the Act and the second ground of the appeal is with respect to disallowance of loss of Rs. 48890050/- claimed by the assessee is a short term capital loss. Ground No 1 of the appeal of the asessee is not pressed and hence it is dismissed. 3. Ground no 2 is against the disallowance of short term capital loss on sale of shares disallowed by the ld AO as sham transaction and which is upheld by the ld CIT (A) not as a sham loss but as speculation loss applying explanation to section 73 of the Act. The brief facts of the case are that the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion was high, (d) However it soon became apparent that the claims of the said companies were not based on a realistic assessment of their capabilities and business prospects and as such locking up substantial capital therein would not lead to commensurate profits either m the medium or even the long term. As such the same were sold off in an off market deal, at the best available price with a view to minimize basis and free capital which was otherwise locked up in unprofitable ventures and which could now be used for further more profitable ventures, (e) Even otherwise it cannot be said that the transactions are sham in as much as the sale is through normal banking channels supported by duly executed and valid transfer deeds in accordance with the process of law. The transactions are duly entered into the books of accounts of all the parties concerned whereby the legitimacy of the transactions is conclusively proved. In the instant case the entire transaction is duly supported and documented by all the parties thereto and also supported by the fact of consideration having been passed between the buyer and seller companies. In these circumstances it is clear that the same can by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stments in the two companies i.e M/s Dependable Transport Pvt, Ltd. and M/s Supreme Placement Services Pvt. Ltd. were made on the basis of future business plans and prospects arising out of personal discussion and that the potential for future growth and resulting capital appreciation were foreseen. On the other hand, it is submitted that the apparent claims of the said companies were not based on realistic assessment of the capabilities and business prospect. This submission of the assessee cannot be accepted by any stretch of imagination as the assessee himself is a stake holder in the two companies and had a fairly good idea and perfect knowledge of the financial affairs of the two companies. Being a substantial shareholder in the above two companies, the assessee had the first hand knowledge of the general affairs of these two companies. The assessee had all the knowledge before making investment in these two companies. Thus, it can be said without any element of doubt that the investments have been planned in such a way so as to adjust the loss incurred on the transactions made with the above companies against the income generated. 4.5 As per details filed by the assessee th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,88,90,050/- The details of the transactions in the purchase and sale of shares of M/s Supreme Placement Services Pvt. Ltd. and M/s Dependable Transport Pvt. Ltd, resulting in the above loss are as follows:- s. No, Name of the Scrip Date of purchase No of shares Cost Price (Rs.) Date of Sale No of shares Sale Price (Rs.) Loss (Rs.) Total Rate Total 1. (a) M/s Supreme Placement Services Pvt Ltd 23.05.07 170000 17000000 18.1.08 170000 10 1700000 15300000 (b) -do- 08.09.07 48200 4822050 18,1.08 48200 10 482000 4340050 (c) -do- 13.09.07 170000 17000000 18.1.08 170000 10 1700000 15300000 2. (a) M/s Dependabl e Transport Pvt Ltd 07.09.07 125000 12500000 18.1.08 125000 10 1250000 11250000 (b) -do- 08.09.07 30000 3000000 18.1.08 30000 10 300000 2700000 TOTAL LOSS 48890050 The Appellant Company had invested in the said two companies viz M/s Supreme Placement Services Pvt. Ltd and M/s Dependable Transport Pvt Ltd on the basis of their future business plans and prospec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd 'Income from Other Sources '. b) A company whose principal business is of banking or granting of loans/advances The above explanation does not apply to the assessee since its main business consists of "Capital Gains. But the assessee on his own w.r.t. his reply to 14A had said that his main business is supply of man power which forms a pre-dominant part of its business activities. (Detail is given at page 4 of this order). This is shows that it is not Capital Gain but supply of Man power is his pre-dominant business activities hence Sec. 73 is applicable and as a result carry forward of Short Term Capital Loss is dismissed. In result the appeal is partly allowed." 5. Therefore, assessee aggrieved by the above said orders has preferred appeal before us. The ld AR submitted that the assessee has earned short-term capital loss of Rs. 48890050/- during the year. For this he referred to the computation of total income placed at Page 2 of the paper book. He submitted that during the year the assessee has purchases 17000 shares on 23.05.2007 of Supreme Placement Services Pvt. Ltd from Kingfisher Packaging Pvt Ltd. He further submitted that on 08.09.2007 the assessee ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion to section 73 of the Act holding that it is speculative loss. He submitted that ld CIT (A) has already held that transactions are not sham. He submitted that acceptance of the transaction of the ld CIT(A) holding it to be a speculative loss proves that order of the ld AO holding transaction of loss in shares is not sham. He submitted that main income of the assessee company is capital gain and not business , therefore provision of that explanation does not apply to the facts. He submitted that while disallowing 14 A something is mentioned is not determinative of the business of the assessee. Ld AO himself has taxed the above short term loss of shares under the head „ Capital gains‟ . He submitted that there is gain of 32511441 as long term capital gain and other short term capital gain of Rs. 15843649/- on shares and Rs. 186581 on non trade investments which are charged under the head „ capital gains‟, therefore the main income of the assessee is not business. Hence, according to him, explanation section 73 does not apply. He further relied on the decision in DCIT Vs. Jindal Export 101 ITD 129 and ACIT Vs. Viraj Investment 210 Taxmann 418. 7. The ld DR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e transaction purchase and sale is sham. The identical question arose before the Hon Gujarat High court in ACIT V Biraj Investments ( P ) Ltd [2012]24 taxamnnn.com 273 [Guj] where in has been held as under :- "3. The Assessing Officer noted that the shares of Rustom Mills and Industries Ltd., which the assessee sold were pledged with the IDBI Bank. The original share certificates were also lying with the said Bank. The assessee had also handed over duly executed transfer forms to IDBI. The Assessing Officer, therefore, called upon the assessee to clarify how under such circumstances the assessee could sell the shares. The Assessing Officer further noted that the purchaser company, viz. Bijal Investment Ltd and the assessee company, viz. Biraj Investment Pvt. Ltd. were part of the same group of companies. The Assessing Officer also noted that directors of both these companies were common. He noticed that the husband of the common Director of these companies was the Managing Director of Rustom Mills and Industries Ltd. These companies, i.e. the assessee company and the purchaser company were therefore aware of the bad financial condition of Rustom Mills and Industries Ltd. The purc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore the Tribunal. The Tribunal by the impugned order reversed the orders passed by the Revenue Authorities. Tribunal placed reliance on a decision of the Madras High Court in the case of A.M.P. Arunachalam v. A.R. Krishnamurthy [1979] 49 Comp. Cas. 662 (Mad) wherein the facts were that R had borrowed a sum of Rs. 35,000/- with security of 5000 shares held by him in a private limited company. The share certificates together with blank transfer forms duly signed by R were handed over to the creditors. R sold the shares to the plaintiff requesting him to discharge the debts due to defendant Nos.1 and 2 amounting to Rs. 37,602/- out of the sale consideration. He authorized defendant Nos.1 and 2 to deliver the share certificates and the blank transfer forms on the debt being discharged. When defendant Nos. 1 and 2 failed to hand over the share certificates together with blank transfer deeds signed by R and other related documents, the 1st plaintiff instituted suit seeking declaration that he had title over the shares and they belonged to him and for consequential directions. In this background, the High Court upheld the case of the plaintiff observing that transfer of interest in the sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... & Co. Ltd. (supra) to contend that transaction itself should be ignored as being a colourable device to avoid tax. Counsel drew our attention to some of the observations made in a recent decision in the case of Vodafone International Holdings B.V. v. UOI [2012] 341 ITR 1/ 204 Taxman 408 /71 taxmann.com 202 (SC) reported in wherein the ratio of the decision in the case of McDowell & Co. Ltd. (supra) came up for consideration in view of the later decision of the Apex Court in the case of UOI v. Azadi Bachao Andolan [2003] 263 ITR 706/ 132 Taxman 373. 11. On the other hand, learned counsel Shri Bandish Soparkar for the respondent assessee contended that this is not a case of colourable device. The assessee in its own wisdom desired to dispose of certain loss making shares. No provision of the Act or any other provision of law prohibits the assessee from disposing of such assets. Simply because during the same year, the assessee also sold certain other shares for a profit, it cannot be stated that there was an attempt to avoid tax. 12. Counsel submitted that what section 108 of the Companies Act prohibits is registration of transfer of shares by the company without following certa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h cannot be identified with the fullness of the right which he enjoyed in the asset before it entered the partnership capital. 14. Having thus heard the learned counsel for the parties, we find that the relevant facts are not in dispute. The respondent assessee sold shares of Rustom Mills and Industries Ltd for a sum of Rs. 4,01,000/- on which transaction, the assessee claimed long term capital loss of Rs. 8,38,790/-. During the same period, the assessee also sold certain shares of Rustom Spinners Ltd. and showed long term capital gain of Rs. 1,46,792 and short term capital gain of Rs. 7,41,563/-. It is also not in dispute that the shares of Rustom Mills and Industries Ltd. were pledged by the assessee with IDBI Bank. The original share certificates along with the transfer form duly signed by the assessee were in possession of the IDBI Bank. The assessee had also undertaken not to transfer such shares. 15. Despite such facts, we are of the opinion that the assessee having entered into the agreement dated 24th March 1993 with the purchaser Company and further having given power of attorney dated 30th March 1993 and received the full sale consideration from the purchaser company, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the transferee and further fulfilling the procedural requirements specified therein has been delivered to the company along with the certificate relating to the shares or debentures along with the letter of allotment of shares or debentures. Therefore, it would not be difficult to envisage that if the purchaser company had tried to register the same in its name by virtue of the present transfer, such attempt would be met with stiff resistance from IDBI Bank. 16. In the present proceedings, however, we are not concerned with such internal disputes. We are primarily concerned with the question whether by virtue of the agreement dated 24th March 1993, and the irrevocable power of attorney given by the assessee to the purchaser company on 30th March 1993, and also having received the full sale price of the shares, section 2(47) of the Act apply. In our opinion, the assessee did transfer whatever rights it had in the shares to the purchaser company. If such transfer is not recognized by the IDBI and there are other legal implications of breach of undertaking given to IDBI, such issue would have to be thrashed out between the concerned parties. Insofar as income tax proceedings are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ital gain received by it during the year under consideration. 18. In the case of CIT v. Sakarlal Balabhai [1968] 69 ITR 186 (Raj.), a Division Bench of this Court observed that avoidance of tax cannot include every case of reduction of tax liability of an assessee. The assessee may enter into a transaction which has the effect of diminishing his income and consequently reducing his tax liability. In such a case, there would be no avoidance of tax, For example, a case where the assessee makes a gift of shares to his son. By reason of gift income from the shares would not accrue to the assessee but would accrue to the son and to that extent the income of the assessee would be diminished and his tax liability reduced. This cannot be regarded as a case of tax avoidance even if the motive of the assessee in making the gift was to save tax on the income from shares at a higher rate applicable to him. 19. Under the circumstances, even without referring to the decision of the Apex Court in the case of Azadi Bachao Andolan (supra) and the observations made in the later decision in the case of Vodafone International Holdingss B.V. (supra), we do not find that this a case which would fall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he heads "Interest on securities" , "Income from house property", "Capital gains" and "Income from other sources"], or a company [the principal business of which is the business of trading in shares or banking] or the granting of loans and advances) consists in the purchase and sale of shares of other companies, such company shall, for the purposes of this section, be deemed to be carrying on a speculation business to the extent to which the business consists of the purchase and sale of such shares.] 10. It is apparent that above explanation applies in the case of the company whose any part of business consists of the purchases and sales of the shares of other company the such business shall be deemed to be speculative business. Hence, loss or profit arising therefore under the head‟ Business Income‟ shall be dealt with accordingly. On looking at the computation of the total income of the assessee, business income of the assessee is Rs. 128860/-. The capital Gain shown by the assessee is Long-term capital gain of Rs. 32511441/- , short term capital gain of Rs. 15843649/- and profit on investments is Rs. 186581/- and short-term capital loss of Rs. 48890050/-. Explanatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issioner of Appeals that the appellant has not purchased the shares as a dealer; shares were purchased because of certain financial problems of the sister company viz., Madras Cements Limited. Subsequently, when the shares were sold the market had not been favourable to the assessee and that is how he sustained loss. There is no intention to speculate and to benefit out of the speculation as there was a clause in the Memorandum of Association to invest surplus funds in shares, the appellant has chosen to invest fund in shares. Moreover, the transaction is not periodic. It was also not settled otherwise than by actual delivery. Only when there is settlement otherwise than by delivery speculative transaction can be thought of. In the present case, it is not so. As the main activity is only in manufacture and sale of yarn, the purchase of shares, having not been regular, should be construed only as an investment. When there is no systametic or organised course of activity and when there is no regularity in the transaction and as the purchase is infact an one time activity it cannot be construed as a speculative transaction. When the purchase of shares cannot come within the definition ..... X X X X Extracts X X X X X X X X Extracts X X X X
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