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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 ..... rned 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 appellant's case, the learned CIT(A) has grossly erred in upholding disallowance of short term capital loss of Rs. 1,80,00,000 suffered by the appellant on the sale of 4,000 equity shares of Anukul Investments Pvt. Ltd. 3. In law and in the facts and circumstances of the appellant's case, the learned Crp(A) has grossly erred in upholding the disallowance of Rs. 10,62,041 on 'account of expenses debited to the appellant's Profit and Loss Account made by the learned Assessing Officer after invoking Section 14A of the Income-tax Act, 1961 and Rule 8D of the Income-tax Rules, 1962. 4. In law and in the facts and circumstances of the appellant's case, the learned CIT(A) has grossly erred in dismissing Ground No. 8 of the appellant's appeal before him challenging the learned Assessing Officer's action of adding the amount of Rs. 10,62,041 disallowed u/s. 14A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 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 loss claimed by the assessee on the sale of shares of the companies stand as under: Name of Security Security sold to Date of Investments No. of Shares purchases Purchase Value Price/ shares Date of Sales No. of share sold Value of sales Sales value per unit Indexed Cost Profit /Loss Anukul Investmets Sanjay Family Trust 5/10/07 4000 5000 20000000 27/03/08 4000 2000000 500 174 -18000000 Anagram Stockbro King Ltd. Anagram securities 20/10/07 7000 280.18 1961260 31/2/07 7000 266000 38 72 -1965260 Anagram Stockbro King LRd Anag Securities Ltd. 23/10/07 8750 280.88 2457704 31/12/07 8750 332500 38 69 -2125204 Anagram Stockbro Kind Ltd. Anagram SecuriitIes 23/10/07 105000 280.88 29492478 31/12/07 105000 3990000 38 69 -25502478 5841.94 6588500 -47322952 4.2 The facts regarding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erm capital gain earned by it in the year under consideration. In view of the above, the AO held that the impugned loss was generated by the assessee in order to reduce the tax liability. Thus such loss represents the bogus loss which was generated using the colorable device. Accordingly, the AO disallowed the same and added to the total income of the assessee. 5. The facts regarding the STCL of Rs. 2,93,33,942.00 in respect of M/s Anagram Stock broking Ltd. ( for short ASBL ) stands as under: i. The assessee purchased 1,20,750 shares of ASBL at Rs. 280.12 per share and sold the same at Rs. 38.00 per share during the year which resulted short-term capital loss of Rs. 2,93,33,942.00 in the year under consideration. ii. The assessee was the major shareholder in ASBL among the other parties. Other parties were also holding the shares of ASBL as detailed under: 1. Ashish Patil 7,000 shares 2. Darshan Mehta 8,750 shares 3. Himanshu Dalai 1,05,000 shares The above parties were employees in the group company of the assessee. iii. The assessee was in the process of selling its shareholding in ASBL. The assessee being our major shareholder in ASBL has also acquired the shar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mined under the head capital gain. Therefore, there cannot be any disallowance of the loss claimed by the assessee on the ground that it was arising from the transactions carried out with the related parties. 5.5 The assessee also claimed that the impugned loss cannot be disallowed merely on the reason that it has not substantiated its understanding of 2002 with the AIPL for subscribing the shares. It is because there are other circumstantial evidences which are contemporaneous for justifying the understanding between the assessee and AIPL for the acquisition of the shares. 6. However, the learned CIT (A) disregarded the contention of the assessee and confirmed the order of the AO by observing as under: "3.3 I have considered the facts of the case; assessment order and appellant's submission. Assessing officer disallowed short-term capital loss of RS 1,80,00,000 claimed and adjusted against capital gain by the appellant. Assessing officer very elaborately discussed the nature of transactions and how the loss is not allowable. AO discussed appellant's submissions in detail and held that the loss claimed by the appellant is not genuine but created with the group entity. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee was selling the entire shares as held by it of ASBL. Therefore, the shares held by the employees as discussed above were required by it to avoid any possible hurdle in the process of selling the shares of ASBL. 6.2 Even if the shares would have been acquired directly by ACL from these employees, then also the purchase price would not have been disturbed by the Revenue. Moreover, the AO has no role in directing the assessee to conduct its business in a particular manner. It was the decision of the assessee to acquire the shares of ASBL and sell the same to ACL which cannot be questioned by the AO. 6.3 The assessee also claimed that the Revenue on one hand is accepting the long-term capital gain declared by it from the transactions carried out within the group companies but on the other hand it is disallowing the losses from the transactions carried out by it within the group companies. As such, the AO cannot take different stand for the similar transactions. 7. The learned CIT (A) after considering the submission of the assessee deleted the disallowance made by the AO by observing as under: "4.3 I have considered the facts of the case; assessment order and appellant' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he group company at a negotiated price of RS 38 per share. Appellant earned substantial long-term capital gains on transfer of its own holding whereas suffered short-term capital loss on shares purchased to gain complete control of the company. There is no provision under the law in which declared sale consideration can be changed for the purpose of computing capital gain. Therefore the sale consideration declared by the appellant in a group company transaction cannot be changed unless it is proved that undeclared consideration has passed. Therefore assessing officer cannot change the long-term capital gain disclosed by the appellant and at the same time the loss suffered in the same transaction cannot be ignored. The decisions relied upon by the assessing officer cannot be applied to the peculiar facts of this case. Assessing officer himself mentioned in the assessment order- "The arguments put forth by the assessee company do explain the reasons for fhe purchase of shares at * 280.88/-," From the above, it is clear that assessing officer was satisfied with the reasons for purchase of shares at 280.88 per share. The purchase consideration is therefore final and cannot be distu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he order of the authorities below as favourable to them. 11. We have heard the rival contentions and perused the materials available on record. At the outset, we note that the ITAT in the own case of the assessee involving identical issues in ITA No. 218/AHD/2016 pertaining to the assessment year 2010-11 vide order dated 31st December 2018 has decided the issue in favour of the assessee and against the Revenue. The relevant extract of the order is reproduced as under: 10. We have heard the rival contentions and perused the materials available on record. In the instant case, the assessee has sold equity shares of Arvind Ltd at Rs. 28.83 per share which is less than the price listed on the stock exchange by Rs. 4.99 per share. The assessee has sold 30 Lacs shares of Arvind Ltd which resulted in the long-term capital loss of Rs. 1,49,70,000/- on account of the difference in the price as discussed above. The assessee sold these shares to Shri Sanjay Lalbhai who is the director in assessee company as well as Arvind Ltd. Accordingly, the AO was of the view that the loss claimed by the assessee has been generated through the use of a colorable device. 10.1 Therefore, the same was dis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provision to determine the sale price of the shares of the listed company, we are inclined to hold that the price declared by the assessee is correct and within the provisions of law. 10.7 We also find that a new section 50CA of the Act was inserted by the Finance Act 2018 which is applicable from 1st April 2018, the relevant extract of the section is reproduced as under: "[Special provision for full value of consideration for transfer of share other than quoted share. 50CA. Where the 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.]" 10.8 From the plain rea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... raph 16). K.P. Varghese case (supra) case holds that sub-sections (1) and (2) relate to transactions, which were not at arm's length between related parties and third parties respectively, but the two provisions were integrally connected inasmuch as they would apply when there was evidence and material to show that the consideration declared and disclosed was under-stated and not the actual consideration received by the assessee. Only when the said pre-condition was satisfied, the Assessing Officer was entitled to treat the fair market value as the full value of consideration. Difference between the consideration actually received and market value of consideration by itself would not justify invoking the said Section. The aforesaid ratio has been followed by the Supreme Court in CIT v. Shivakami Co. (P.) Ltd. [1986] 25 Taxman 80K/159 ITR 71, which observes that the provision would apply only when there was consideration and which consideration actually received was more than the consideration disclosed or declared. Further, onus was on the Revenue to prove under-statement of the said consideration. Section 52 was not meant to apply to tax capital gains on the basis that the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct the sales tax on such excise duty. It is pertinent to note that the Hon'ble SC before the amendment in the rules 76 & 79 decided the issue in favor of the assessee reported in 1 SCR 914 dated 25-10-1976. Thus the assessee defaulted in complying the amended distillery rules 76 & 79 w.e.f. 4-8-1981. Thus the Hon'ble Apex Court decided the issue in favor of Revenue. Hence we are of the considered view that the principles laid down by the Hon'ble Apex Court cannot be applied in the case before us as the facts are different. 11.2 It is also pertinent to note here that the Hon'ble apex court in case of Union Of India And Anr vs. Azadi Bachao Andolan (263 ITR 705) discussed the case McDowell & Co. Ltd vs. Commercial tax officer (supra) in detail and distinguished from it by observing as under: "We may in this connection usefully refer to the judgment of the Madras High Court in M.V.Vallipappan and others v. ITO , which has rightly concluded that the decision in McDowell cannot be read as laying down that every attempt at tax planning is illegitimate and must be ignored, or that every transaction or arrangement which is perfectly permissible under law, which has the effect of reduci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mspection, within the frame work of law, unless the same fall in the category of colorable device which may properly be called a device or a dubious method or a subterfuge clothed with apparent dignity. It was with this consciousness that the Court has used these expressions while depreciating the schemes of tax avoidance in the name of tax planning. All the expressions used by their Lordships in depreciating the methodology of tax avoidance through tax planning of resorting to 'colorable device', 'dubious methods or subterfuge' have special significance in legal world. In the context of the present discussion, the meaning assigned to 'colorable' in Brown's Judicial Dictionary has been defined as 'reverse of bona fide'. Black's Law Dictionary explain 'colorable' to mean 'that which is in appearance only, and not in reality, what it purports to be, hence, counterfeit, feigned having the appearance of truth'. So also a device. The context in which the expression device has been used in its ordinary dictionary meaning as per Shorter Oxford Dictionary means 'inneuity, something device, arrangement, plan, contrivance, a p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... calculated at a fixed rate and diverting the income resulted in reducing the bonus liability. Therefore, Hon'ble Supreme Court held that it is not permissible as the artificial entity was later wound up in 2 years. But we find that facts in the case on hand are different from the case as mentioned in the immediately preceding paragraph. Further, we also note that the above case was related to the issue of labors while the present case is related to tax planning. Thus, the principles laid down concerning the labor laws cannot be adopted in the case before us. 11.6 We also note that there was no set off of such loss against any income till the date of passing the order as claimed by the assessee. The Learned DR before us has not brought any iota of evidence against the argument of the learned counsel for the assessee. Thus we feel that had the loss claimed by the assessee been colorable device then, the assessee should have claimed set off of such loss against the income as per the provisions of the Act. As the assessee has not claimed the set off of such loss, we are of the view that the same cannot be held as the result of the colorable device. 11.7 We also note that the purcha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nvolved in such transaction were identifiable and the whole transaction was based on the documentary evidence. Now the question arises to determine the price at which the assessee sold these shares. It is an undisputed fact that the assessee acquired shares of AKAL at a premium of Rs. 490 per share having face value at Rs. 10 per share only. These shares were sold at a price of 150 per share which is in excess than the fair market value of the shares determined as per rule 11UA of Income Tax rule. As per rule 11UA, the value of the share comes at Rs. 109 per share. Therefore, there remains no doubt that the price of the share sold was at a higher price than the fair market value. 19.3 Under the income tax provision, we note that there was no mechanism to determine the purchase & sale price of the share at that the relevant time. The lawmakers to determine the transfer value of unquoted share brought special provision by introducing Section 50CA of the Act which reads as under: "[Special provision for full value of consideration for transfer of share other than quoted share. 50CA. Where the consideration received or accruing as a result of the transfer by an assessee of a cap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... we also find support and guidance from the judgment of Asara Sales and Investments Private Limited (ITA No. 1345/PUN/2014) wherein it was held as under: "19. Another aspect of the issue is the allegation of Assessing Officer that as against book value of share as on 31.03.2008 at Rs. 59.61 per share, the shares of GGDL were sold at Rs. 48/- per share to another group concern BVHPL. These shares were acquired by the assessee @ Rs. 74.25 in December, 2006. The said transaction as per the Assessing Officer suggested colorable device so that by selling the shares to its own subsidiary, at prices above or below the book value, the assessee was manipulating the income to reduce its tax liability. First of all, as decided in the paras hereinabove, the shares have not been sold to subsidiary of the assessee but to a concern from whom the assessee has raised loan to the extent of Rs. 18 crores and the decision was taken to repay the loan and arrest the payment of interest on such loans, the shares of the group concern were sold in off market transaction to BVHPL. The said transaction is not a colorable device. Further, the assessee has sold the shares on the market price prevailing on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee did not file any cogent material/evidences to justify chargeability of such a huge share premium from three new shareholders vis-a-vis issuing shares at par to original promoters within same relevant year under consideration - It was also undisputed that three companies paying huge amount to assessee, had miniscule paid up capital and earned very small profits and, thus, they were not in a financial condition to subscribe to assessee's shares at such a high premium - Whether, in aforesaid circumstances, Assessing Officer rightly concluded that assessee failed to prove identity of parties and genuineness of share transactions and, thus, impugned addition was to be confirmed - Held, yes [Para 6] [In favour of revenue]" 19.9 We also feel to clarify that the issue of shares at a premium is the prerogative of AKAL which cannot be questioned. Similarly, the decision of the assessee to subscribe the shares of AKAL at a premium is its prerogative which cannot be questioned. The only test to treat the sum of share capital as income under section 68 of the Act or 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the shares in the financial year 2012-13 say at Rs. 150 per share. The sale price of the shares was determined as per the provisions of rule 11UA of Income Tax Rule. Accordingly, the assessee shall claim the loss of Rs. 3,500.00 ( Rs. 5000- 1500 ) in its books of accounts. The question arises whether the loss claimed by the assessee is allowable. The answer is yes. It is because the purchase value cannot be disputed and the sale price of the shares was determined as per the provisions of Income Tax Rule. Therefore the loss claimed by the assessee is within the provisions of the Income Tax Act. 20.4 In our considered view the same logic can be applied to the case on hand. However, the facts of the case in hand are a bit different from the example given above. In the case on hand, the shares were sold within 5 days from the date of acquisition. Accordingly, the loss was incurred in the same financial year in which the assessee acquired the shares. The transaction resulting the loss creates suspicion in the mind that it was generated 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... egation of the Revenue that such loss was created to claim the set off of the future income. The future income is unseen and unpredictable and it was not possible to design the same in the relevant year. Therefore, we are of the view that such loss cannot be disallowed keeping in mind the future income of the assessee. 20.8 Thus simply the transaction was carried out among the related parties can not the ground to hold that the loss claimed by the assessee is bogus. The taxability of the transaction has to be seen as per the provision of the Act. It cannot be decided based on emotions and the moral of the assessee. In this regard we find support & guidance from the judgment of Hon'ble Apex Court in the case of CIT Vs. A. Raman & Co. reported in 67 ITR 11 wherein it was held as under: "Avoidance of tax liability by so arranging commercial affairs that charge of tax is distributed is not prohibited. A taxpayer may resort to a device to divert the income before it accrues or arises to him. Effectiveness of the device depends not upon considerations of morality, but on the operation of the Act. Legislative injunction in taxing statutes may not, except on peril of penalty, be violat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee, in our opinion, was not correct. We are of the view that the Tribunal rightly upheld the finding of the Commissioner of Income-tax (Appeals). It is not a case where any understatement of value or misstatement of value of the shares sold was made by the assessee. This is a case where the assessee had sold the shares at a value admittedly lower than the market price. Yet the shares could not be assessed on the difference amount being her income because no inference can be drawn in the facts and circumstances of the case that the design of the assessee was such that she concealed certain facts and she received the difference of the value by fraudulent means. There was no evidence direct or inferential, nor was there any finding by any income-tax authority that the assessee indulged in such a practice. We are fortified in our view by a judgment of the Supreme Court in the case of CIT v. Shivakami Co. Pvt. Ltd. [1986] 159 ITR 71 (SC). We also find support in our view from a Division Bench judgment 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uring the previous year when the assessee had also sold some shares at profit by itself would not mean that this is a case of colourable device or that there is a case of tax avoidance. Further, there is no restriction that such sale or transaction cannot be effected with a group company. As long as the Revenue could not doubt the sale price of the shares, it would not be open for the Revenue to contend that the assessee had shown loss which it did not really suffer. In the present case, it is not even the case of the Revenue that shares were sold at a price lower than the market rate. If that be so, the question of inflating the loss by transferring the shares to group company would not arise. Under ordinary circumstances, it is always open to the assessee in his own wisdom to either hold on to certain bunch of shares or to sell the same to avoid further loss, if he finds that market value of the shares is fast diminishing. It is equally open for the assessee to effect such 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the stand of the Revenue was contradictory. 12. In view of the above, we are not inclined to uphold the order of authorities below for short-term capital loss on sale of shares of AIPL for Rs. 1,80,00,000/- and uphold the order of ld. CIT(A) for the loss on sale of the shares of ASBL for Rs. 2,93,22,942/- only. Hence the ground of appeal of the assessee is allowed, and ground of appeal of the Revenue is dismissed. The next issue raised by the assessee in ground nos. 3 & 4 is that the learned CIT(A) erred in confirming the disallowance of Rs. 10,62,041.00 under the provisions of section 14A read with rule 8D of Income Tax Rule and under the provisions of section 115JB of the Act. 13. The assessee during the year has earned dividend income of Rs. 74,54,831/- which was claimed as exempt income under section 10(34) of the Act. The assessee in respect of such income has made the following disallowances in its income tax return for the direct interest 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 Rs. 10,62,041.00 only in the profit & loss account which has not been incurred in connection with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessing officer @.5% of investment resulting in exempt income is as per the formula given in rule 8D which is mandatory for making disallowance. However assessing officer restricted the disallowance to the expense claimed in P&L account. In view of this the addition made by the AO which is much less than .5% of investment resulting/ in exempt income made by the assessing officer is confirmed. As regards interest, appellant had borrowed funds on which interest was paid. While making investments, both borrowed funds as well as own funds were used hence one cannot say that borrowed funds were used only for business purpose and owned capital was only used for investment. Admittedly no separate accounts are maintained for business and investment 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 ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tice and fair play and to avoid the possible leakage of the revenue, we are of the opinion that the justice will be served to both the parties if the disallowance on account of administrative expenses is restricted to the tune of Rs.3 Lacs only. 19.4 Regarding the disallowance of the expenses under the provisions of section 115 JB of the Act, we note that in the recent judgment of Special Bench of Hon'ble Delhi Tribunal in the case of ACIT vs. Vireet Investment Pvt. Ltd. reported in 82 Taxmann.com 415 has held that the disallowances made u/s 14A r.w.r. 8D cannot be the subject matter of disallowances while determining the book profit u/s 115JB of the Act. The relevant portion of the said order is reproduced 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Act independently. But now we note that there is no mechanism provided under the clause (f) to Explanation-1 of Sec. 115JB of the Act to make the disallowance independently. Therefore our action for restoring back the issue to the file of AO would unnecessarily cause further litigation. Thus we limit the disallowance on an ad-hoc basis @ 1 % of the exempted income as per the clause (f) to Explanation-1 of Sec. 115JB of the Act. Thus the ground of appeal of the assessee is partly allowed. 19.7 The issue raised by the assessee in ground No. 5 and 6 or consequential and the issue raised by the assessee in ground No. 7 is premature to decide. Therefore we dismiss all of them as infructuous. 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 Rs. 60,58,800/-. 2. Without prejudice to the aforesaid ground, on the facts and in the circumstance of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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