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TMI Blog2019 (6) TMI 1414X X X X Extracts X X X X X X X X Extracts X X X X ..... L MEMBER For the Appellant : Shri Mudit Nagpal, S.R. D.R For the Respondent : Shri S.N. Soparkar, Shri Vartik Chokshi Shri Bandish Soparkar, A.Rs ORDER PER WASEEM AHMED, ACCOUNTANT MEMBER: The captioned Cross appeals have been filed at the instance of the Revenue and Assessee against the order of the Commissioner of Income Tax (Appeals)- 6, Ahmedabad [Ld.CIT(A) in short] dated 29/02/2012 arising in the matter of assessment order passed under s.143(3) of the Income Tax Act, 1961 (here-in-after referred to as the Act ) dated 27/12/2010 relevant to Assessment Year (A.Y) 2008-09. First, we take up assessee appeal bearing No. 986/AHD/2012 pertaining to the assessment year 2008-09. The assessee has raised the following concise grounds of appeal vide letter dated 17-12-2016: 1. In law and in the facts and circumstances of the appellant's case, the learned CIT(A) has grossly erred in treating Ground No. 1 of the appellant's appeal before him challenging the very validity of the assessment order impugned before him, as being general in nature and, therefore, not requiring adjudication by him. 2. In law and in the facts and circumstances of the ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... filed in the concise ground of appeal, therefore we dismiss the same as not pressed. 3. Similarly, the issues raised by the assessee in ground No. 5 and 6 are consequential and issue raised in ground No. 7 is premature to decide and the issue raised in ground No. 8 is general, therefore we dismiss all of them as infructuous. The first issue raised by the assessee in ground no. 2 is that the ld. CIT(A) erred in confirming the order of the AO by sustaining the disallowance of loss of ₹ 1,80,00,000.00 on the sale of shares of M/s Ankul Investments Pvt. Ltd. 4. Briefly stated facts are that the assessee in the present case is a private limited company and engaged in the business of carrying investment activity, trading in paintings, shares and securities, consultancy services and conducting capital market-related activities. The assessee in the year under consideration has shown short-term capital loss of ₹ 4,73,22,942.00 on the sale of shares of the companies namely Ankul Investment Pvt Ltd. and Anagram Stock broking Ltd. All the transactions for the purchase and sale of the shares were caried out off market. 4.1 The necessary details of the short-term capital ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e company and Ankul Investment Pvt. Ltd. belongs to the same group i.e. Lalbhai Dalpatbhai Group. iii. Both the companies were operating from the same address. iv. The impugned shares were sold by the assessee at ₹500 per share dated 27th of March 2008 (within the same financial year) to the persons who are part of the group as discussed above. v. The loss incurred by the assessee was set off against the long-term capital gain in the year under consideration. 4.3 The AO during the assessment proceedings sought an explanation from the assessee on the facts as discussed above. The assessee in compliance to the notice of the AO vide letter dated 1st November 2010 submitted that it had advanced the sum of ₹ 1,99,85,000.00 (approximate ₹ 2 crores) in the financial year 2002 -03 to AIPL with the understanding that it will be allotted shares against such advances. But the shares were actually allotted it in the year under consideration at a high premium in order to avoid the payment of the stamp duty. As such it is not the case that the assessee purchased the shares in the year under consideration at a higher value and sold the same in the year under consider ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see purchased the shares after negotiating the price from the aforesaid parties as a measure of business expediency. iv. The assessee also claimed that all the parties above have declared the capital gain income on the sale of shares to the assessee in their respective return. Therefore there cannot be any question of any tax planning to avoid the tax in the impugned loss incurred by the assessee. v. The assessee subsequently has transferred the shares held by it as well as the shares acquired by it from the parties above after negotiating the price at ₹ 38 per share. 5.1 However, the AO disagreed with the submission of the assessee by observing that the assessee after purchasing the shares from the parties as discussed above has transferred the shares to Anagram Capital Ltd. (for short ACL). As such, ACL could have purchased the shares from the parties as discussed above directly and without the involvement of the assessee. In that event the loss incurred by the assessee could have been avoided. Accordingly, the AO was of the view that the assessee has incurred such loss to avoid the long-term capital gain income earned by it. Thus the AO treated such loss as genera ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to a group company AIPL in 2002 which was converted into shares in October 2007with the premium of RS 4990 per share The same shares were sold at RS 500 per share within six months to Sanjay family trust, another group entity. Therefore both purchase and sale transactions of shares are controlled transactions. When shares were allotted at RS 5000 per share, book value of the shares was less than RS 300 per share. This means/ shares were allotted at huge premium without any basis. The unreasonable and excess premium in such conversion of loan to shares is proved from the sale of these shares within six months at only RS 500. The appellant argued that the loan was to be converted into shares and numbers of shares were be decided after considering stamp duty liability. This clearly shows that the price of shares including huge premium is not in consequence to any valuation but on the consideration of stamp duty liability. Therefore it is clear that appellant did not purchase shares at RS 5000 under any legal obligation or on the basis of any valuation. Appellant also could not submit any / agreement requiring it to purchase these shares at RS 5000 per share. If appellant's argume ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of ₹ 2,93,22,942 on the ground that shares were purchased @ RS 280.88 per share which were later sold at RS 38 per share. It is not in dispute that appellant purchased these shares from three of its key employees. Appellant explained the business expediency and the purpose of paying more purchase price to these persons. Assessing officer is satisfied with the reasons for buying these shares at higher prices. It is not in dispute that these persons are not related to the appellant. They have declared the purchase price paid by the appellant as sale consideration and paid taxes on the same. Since the purchase transactions are with independent persons with business consideration and they paid required taxes on the sale price declared by them, there is hardly any tax planning or manipulation involved in purchase transactions. As far as sale of shares to a group company is concerned, the entire holding of the appellant along with the minority interest shares purchased from three employees were sold at the same rate i.e. RS 38 per share. This sale price is same for the appellant's own holding and the shares purchased during the year. The sale of shares also resulted in lon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rbed as discussed in earlier para. As a result of this, assessing officer cannot ignore longterm capital gain or short-term capital loss arising from these transactions. There is no basis to hold that these transactions were undertaken only to reduce tax liability particularly when these transactions were resulting in long-term capital gain exceeding ₹ 9 crores. In view of this, the disallowance of short-term capital loss made by the assessing officer cannot be sustained. This ground is accordingly allowed. Thus in view of the above, the learned CIT-A allowed the grounds of appeal of the assessee in part. 8. Being aggrieved by the order of the learned CIT (A), both the assessee and the Revenue are in appeal before us. The assessee is in appeal against the disallowance of the short-term capital loss of ₹ 1,80,00,000.00 and the Revenue is in appeal against the deletion of the disallowance of the loss of ₹ 2,93,22,942.00. The grounds of appeal raised by the Revenue stand as under: 1. The Id. CIT(A) erred in deleting the disallowance of short term capital loss of shares amounting to ₹ 2,93,22,942/-. 2. The Id. CIT(A) erred in holding that as the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wed. The view taken by the AO was subsequently confirmed by the learned CIT (A). 10.2 Now the controversy arises whether the loss claimed by the assessee in the given facts and circumstances is based on business expediency or it was used as a tool of a colorable device to generate such loss. 10.3 It is an undisputed fact that all the parties which carried out such transaction were identifiable and there was also a consideration among such parties. The limited issue before us is that whether the assessee can sale listed shares off-market at a price lesser than the price listed on the stock exchange. 10.4 The price prevailing on the stock exchange at the relevant time was ₹ 33.30 per share. It is an undisputed fact that among other things the price at the stock exchange is decided by demand and supply of the shares. It means if there is more supply of the shares in the market, the price of the share will fall and vice versa. Thus, if the assessee would have sold these shares through the network of the stock exchange, the possibility of the reduction in the value of shares in the market would not have been avoided. It is because at that relevant time the daily average n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he plain reading of the above provision we note that the law was amended to bring the transaction of unquoted sale and purchase of shares under the net of income tax concerning the sale price of the shares. As per the provisions of section 50CA of the Act, the sale price of shares other than quoted shares shall be the fair market rate which shall be determined as prescribed under the rule 11UAA of the Income Tax Rule. 10.9 From the above provisions it is clear that the lawmakers have not brought any mechanism to determine the sale price of quoted shares if sold off-market. Thus it is transpired that the sale price of the quoted shares shall be the price as agreed between two parties if it is sold off-market. 10.10 We also note that there is no provision under the head capital gain which empowered AO to determine the fair sale or purchase price of the quoted shares between the related parties unlike the provisions of section 40A(2) of the Act under the head business profession. 10.11 Thus after considering the above facts, we are of the opinion that AO is not correct in challenging the sales consideration decided by the parties. There is no mechanism in the law, as discus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... basis that the assessee might have gained or could have gained a higher price which in fact was not received. Reference can be also made to CITv. Godavari Corpn. Ltd. [1993] 68 Taxman 344/200 ITR 567 (SC) and judgments of this Court in CIT v. Dinesh Jain, HUF [2012] 25 taxmann.com 550/211 Taxman 23/[2013] 352 ITR 629 and CIT v. Gulshan Kumar [2002] 123 Taxman 111/257 ITR 703 (Del). 25. As noted above, Section 52 of the Act was omitted by Finance Act, 1987 with effect from 1st April, 1988. The said provision, therefore, was not applicable in the Assessment Year 1999-2000. We have referred to the aforesaid judgment in K.P. Vearghese case (supra) as this judgment was referred to and distinguished by the tribunal in the impugned order. We have also referred to K.P. Varghese case (supra) to elucidate that the legal ratio propounded with reference to then applicable Section 52 of the Act would be against the Revenue even if the said Section was applicable. It is obvious that when Section 52 of the Act itself was not applicable, the Assessing Officer could not have substituted the actual sale consideration received by the Assessee with another figure stating that this was the fair mar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has the effect of reducing the tax burden of the assessee, must be looked upon with disfavour. Though the Madras High Court had occasion to refer to the judgment of the Privy Council in IRC v. Challenge Corporation Ltd. , and did not have the benefit of the House of Lords's pronouncement in Craven , the view taken by the Madras High Court appears to be correct and we are inclined to agree with it. 11.3 Further, we also note that Hon ble Jurisdictional High Court in case of Banyan And Berry Vs. Commissioner Of Income Tax (222 ITR 831) held that tax planning within the law is permissible and only if any transaction which is reducing the tax liability cannot be regarded as a colorable device. The court also discussed the meaning of colorable device and case of McDowell Co. Ltd vs. Commercial tax officer (supra) in detail. The relevant extract of the order is read as under: From the aforesaid, it is apparent that on the factual aspect the Court was considering the case where in a going business a liability to pay duty which was legally of the assessee and which on such payment was to become part of its cost of commodity sold by it and to become part of its selling price t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ement, plan, contrivance, a plot or a trick. Black's Dictionary refers to device as contrivance, a scheme, trick. Subterfuge - according to ordinary meaning as per the Shorter Oxford English Dictionary - means that to which one refers for escape or concealment. Subterfuge on historical principles means, an article or device to which a person refers in order to escape the force of an argument, an excuse with which conceals a clue.So also the expression dubious refers to a doubtful or of questionable character. That is to say what has been deprecated as tax planning for avoidance of tax are those acts which have doubtful, or questionable character as to their bona fide and righteousness. Not all legitimate acts of a taxpayer which in ordinary course of conducting his affairs a person does and are under law he is entitled to do, can be branded of questionable character on the anvil of McDowell (supra). We are unable to read in the aforesaid decision that any act of an assessee which results in reduction of his tax liability or expectation of tax benefit in future amounts to colorable device, a dubious method or subterfuge to avoid tax and can be ignored if the acts are un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 11.7 We also note that the purchase and sale of the shares by the assessee of the shares of Arvind Ltd were duly supported with the relevant shreds of evidence which are placed on pages 50 to 53 of the paper book. It is also pertinent to note that the lower authorities did not doubt the details of the purchases and sales of the securities. 11.8 In view of the above, we are not inclined to uphold the finding of authorities below. Accordingly, we set aside the order of learned CIT(A) and direct the AO to delete the addition made by him. Hence the ground of appeal of the assessee is allowed. XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX 19. We have heard the rival contentions and perused the materials available on records. In the instant case, the assessee has acquired the shares of AKAL at ₹ 500 per share represented by the premium of ₹ 490 and face value of ₹ 10 per share. The assessee acquired these shares on 20th March 2010 which were sold on 25th March 2010 at ₹ 150 per share resulting in total short-term capital loss of ₹ 3.50 crores which was treated by the AO as a colorable device to generate such loss. Accordingly, the AO disallowed the sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... consideration received or accruing as a result of the transfer by an assessee of a capital asset, being share of a company other than a quoted share, is less than the fair market value of such share determined in such manner as may be prescribed 40a , the value so determined shall, for the purposes of section 48, be deemed to be the full value of consideration received or accruing as a result of such transfer. Explanation.-For the purposes of this section, quoted share means the share quoted on any recognised stock exchange with regularity from time to time, where the quotation of such share is based on current transaction made in the ordinary course of business.] 19.4 However, section 50CA is applicable w.e.f. 01st April 2018, therefore, for the assessment year under consideration there was no mechanism under the law to determine the sale price of unquoted shares. Similarly, there is also no provision under the provision of law to determine the price, which should be taken as the purchase cost of a capital asset. 19.5 Further, we also note that there is an amendment under the provisions of section 56(2)(x) of the Act which reads as under: [(x) Where any person rec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... saction is not a colorable device. Further, the assessee has sold the shares on the market price prevailing on the date of sale and no fault can be found with such transactions undertaken by the assessee. In case as against the market value, the other concern had purchased the shares at a higher value, then it would be questionable, but it is not so, in the present case and hence, we find no merit in the orders of authorities below in holding that the loss claimed by selling the shares of GGDL to its 100% subsidiary below the book value should be ignored while setting it off against the other income, if any, in current year or for carry forward and set off in subsequent years. The loss was worked out at (-) ₹ 2,75,83,524/-. We reverse the orders of Assessing Officer and CIT(A) in this regard and hold that the total loss arising on the said transaction can be adjusted against the gain arising on sale of unquoted shares during the year and balance loss can be carried forward and set off against any other gain arising in the subsequent years. 19.8 We also note that in the case tax needs to be levied on the share capital premium is taxable in the hands of the recipient. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 56 of the Act and that too in the hands of the recipient i.e. AKAL in the instant case. In this regard, we find support guidance from the judgment of Mumbai Tribunal in the case of Green Infra Limited Vs. ITO reported in 38 taxmann.com 253 wherein it was held as under: No doubt a non est company or a zero balance company asking for a share premium of ₹ 490 per share defies all commercial prudence, but at the same time one cannot ignore the fact that it is a prerogative of the Board of Directors of a company to decide the premium amount and it is the wisdom of the shareholders whether they want to subscribe to such a heavy premium. The revenue authorities cannot question the charging of such of huge premium without any bar from any legislated law of the land. 19.10 Thus we hold that the investment made by the assessee at such a high premium and subsequent sale at a loss cannot be the basis holding that such loss is bogus in the given facts circumstances. 20. Now the 2nd controversy arises whether the loss incurred by the assessee on account of the sale of the shares of AKAL is the result of the colorable device used to generate such loss. We want to explain su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d for the purpose of the loss in order to set off the taxable income. Now the next doubt arises that such loss must have been set off against the income. But the fact is that the assessee has not claimed the set off of such loss in the year under consideration. In our considered view this fact cannot be ignored. It is because if the assessee would intend to set off of such loss in the same financial year, then it would have done so in that year only. But the assessee has not done so. Thus had there been any planning of the assessee for creating such bogus loss than it should have claimed the set off of such loss in that year only. It is also pertinent to note that such loss was not set off till the date of the passing of the order by the ld. CIT-A dated 16-11-2015. 20.5 We also note that the assessee acquired the shares at the fag end of the financial year which was sold immediately after the acquisition which resulted in the loss as discussed above, but the same was not set off against any other income. 20.6 In addition to the above, we also note that the assessee could have split the transaction into two financial years by acquiring the shares of AKAL in one year and sellin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot upon considerations of morality, but on the operation of the Act. Legislative injunction in taxing statutes may not, except on peril of penalty, be violated, but it may lawfully be circumvented. 20.9 Thus from the above, we note that the conduct of the assessee is suggesting that the loss was not created purposefully to meet some malafide purposes. 21. We also want to explain such loss incurred by the assessee with the help of another example. 21.1 Supposing Mr. X, a trader in shares, acquires 10 shares of ABC Ltd having a face value of ₹ 10 per share at a premium of rupees 490.00 per share in the financial year 2009-10. Accordingly, Mr. X has shown stock in trade at ₹ 5000 in its books of accounts. Further Mr. X requires to value such stock in trade in the balance sheet as on 31.3.2010 which comes to ₹ 1500.00. Thus there shall be a loss of ₹ 3500 to the assessee which will be allowed to him as a business loss. 21.2 But in case Mr. X classified the shares in its balance sheet as an investment then the loss cannot be allowed to him on account devaluation of the investment at the year-end unless Mr. X sells these. Thus the loss allowable to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dgment of the Bombay High Court in the case of India Finance and Construction Co. Pvt. Ltd. v. B.N . Panda, Dy. CIT[1993] 200 ITR 710. A.Y. 1994-95 We further find that the order of ld. CIT(A) is in conformity with the decision of jurisdictional High Court in the case of Marghabhai Kishabhai Patel Co. (supra) wherein Hon'ble Court referred to the case of Madras High Court in the case of Ramlinga Choodambikai Mils Ltd. vs. CIT (1955) 281 ITR 952 and that of Gujarat High Court in the case of CIT Vs. Keshavlal Chandulal (1996) 59 ITR 120 and held as under:- In absence of evidence to show either that the sales were sham transaction or that the market price were in fact paid by the purchasers, the mere fact that goods were sold at a concessional rate to benefit to purchaser at the expenses of the company would not entitled to income-tax department to assess the difference between market price and price paid by the purchaser as profit of the company. 11. In view of the above and since no contrary decision was cited by the Revenue, we are not inclined to interfere with the order passed by ld. CIT(A) deleting the addition of ₹ 14,14,06,326/- and the same is hereby uphe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h sale during the same year when he also chooses to dispose of certain profit making shares. In the present case, of course, there is a further angle of the shares in question being pledged to IDBI and therefore it would not be possible for the assessee to deliver the original share certificates to its purchaser along with the duly signed transfer forms. As already noted, such special angle may have repercussion insofar as the legal relation between the assessee and the IDBI is concerned and insofar as the purchaser's right to have shares transferred in its name is concerned. This, however, by itself would not establish that the sale of shares was only a paper transaction and a device contrived by the assessee to claim loss which it did not suffer and thereby seek set off against the capital 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 liabil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st expenses of 1,57,202.00 only. 13.1 The assessee regarding the administrative expenses submitted that it has claimed expenses to the tune of ₹ 10,62,041.00 only in the profit loss account which has not been incurred in connection with the earning of the exempted income. There no further disallowance can be made on account of administrative expenses. 13.2 However, the AO disagreed with the contention of the assessee and worked out the disallowance of the expenses under section 14A read with rule 8D as detailed under: 1. Direct expenses under rule 8D(a)(i) 1,57,202.00 2. Interest expenses under rule 8D(a)(ii) 75,442.00 3. Administrative expenses under rule 8D(a)(iii) 50,28,282.00 Total 52,60,926.00 In view of above, the AO worked the disallowance of the balance amount of ₹ 51,03,742.00 (52,60,926- 1,57,202.00 i.e. the amount already disallowed by the assessee) but restricted the actual expenses claimed by the assessee at ₹ 10,62,041.00 and added to the total income of the assessee. 13. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... activities therefore appellant's claim is not justified that borrowed funds were not used in making investment. Therefore In the absence of clear cut details of utilization of funds, the formula given in rule 8D which is mandatory from this year onward is to be applied. The decisions relied upon by the appellant are not applicable in view of the fact that dividend receivable on even trading stock is exempt and disallowance of expenses are to be made. In view of this, the computation of disallowance made by the appellant by excluding stock of shares is not correct. Since assessing officer worked out the interest and direct expenses disallowance as per rule 8D, the same is confirmed. 16. Being aggrieved by the order of the ld. CIT(A), the assessee is in appeal before us. The learned AR before us submitted that the entire amount of the expenditure claimed by the assessee cannot be disallowed under the provisions of section 14A read with rule 8D of Income Tax Rule. 17. The learned AR further submitted that the amount disallowed under the provisions of rule 8D cannot be imported while working out the tax liability under the provisions of section 115 JB of the Act. The learned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... below: In view of above discussion, the computation under clause (f) of Explanation 1 to section 115JB(2), is to be made without resorting to the computation as contemplated under section 14A, read with rule 8D of the Income-tax Rules, 1962. The ratio laid down by the Hon ble Tribunal is squarely applicable to the facts of the case. Thus it can be concluded that the disallowance made under section 14A r.w.r. 8D cannot used while determining the expenses as mentioned under clause (f) to explanation 1 to section 115JB of the Act. 19.5 However, in our considered view the disallowance needs to be made as per Clause (f) to Section 115JB of the Act independently. In holding so, we draw our support from the judgment of Hon ble Calcutta High Court in the case of CIT Vs. Jayshree Tea Industries Ltd. in GO No.1501 of 2014 (ITAT No.47 of 2014) dated 19.11.14 wherein it was held that the disallowance about exempted income needs to be made as per the clause (f) to Explanation- 1 of Sec. 115JB of the Act independently. The relevant extract of the judgment is reproduced below:- We find computation of the amount of expenditure relatable to exempted income of the assessee must be mad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In the result the appeal of the assessee is partly allowed and the appeal of the revenue is dismissed. Coming to ITA 3462/AHD/2014 The assessee has raised the following grounds of appeal: 1. On the facts and in the circumstances of the case, the learned CIT(A) erred in upholding the legality of the Assessing Officer's order passed u/s.271(1)(c) of the IT. Act levying penalty of ₹ 60,58,800/-. 2. Without prejudice to the aforesaid ground, on the facts and in the circumstance of the case, the learned CIT(A) erred in confirming penalty levied by the Assessing Officer u/s.271(1)(c) of the IT. Act amounting to ₹ 60,58,800 with reference to the addition confirmed by the CIT(A) in quantum appeal. 3. On the facts and in the circumstances of the case and without prejudice to the foregoing grounds of appeal, the learned CIT(A) erred in not dealing with and deciding ground no.3 raised before him challenging the quantum of penalty at ₹ 60,58,800/- on the basis of such amount of tax allegedly sought to be evaded as was based on the rate of tax application to normal source of income instead of the correct rate of 20% application to indexed long term ca ..... X X X X Extracts X X X X X X X X Extracts X X X X
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