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TMI Blog2024 (10) TMI 168X X X X Extracts X X X X X X X X Extracts X X X X ..... nsfer of shares of Rasi Cements Ltd. Appellant entered into a MOU with and M/s. Kalahasteeswar Finance Pvt. Ltd for acquiring shares at Rs.25 per share. Although, as per MOU shares has to be purchased at Rs.25/- per share, why it has paid Rs.109 per share to the above parties is not explained. Therefore, reasons given by the learned CIT (A) to adopt purchase price of Rs.33 per share for all the share purchase from 3 entities is based on well reasonings and on relevant facts. Transaction of the appellant for purchase and sale of shares of M/s. SVCL is not genuine transaction but a transaction designed to avoid payment of taxes arising on capital gain due to transfer of shares of Rasi Cements Ltd. CIT (A) after considering the relevant facts has rightly recomputed the Short-Term Capital Loss on sale of shares by adopting the cost of purchase at Rs.33/- per share. Thus, we are inclined to uphold the findings of the learned CIT (A) and rejects the grounds taken by the assessee. Disallowance of interest expenditure u/s 14A - AO disallowed interest paid on loan on the ground that the appellant has utilized interest bearing fund for making investment in shares and securities which yield e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by the appellant. 6. The learned Commissioner of Income Tax (Appeals)-5, Hyderabad, ought to have appreciated the fact that, the appellant company had purchased the shares as an associate company in the background of Kaiahasteeswara Finance Pvt Ltd., as acquirer under the scheme of "open offer" for acquisition of shares as approved by Securities and Exchange Board of India (SEBI) and further supported by MOU between the appellant and Kalahasteeswara Finance Pvt Ltd. 7. The learned Commissioner of Income Tax (Appeals)-5, Hyderabad, ought to have appreciated the fact that, the appellant company has given the written consent for price revision of Rs.100 per share as per clause 5 of the MOU for acquisition of the shares in Open Offer. 8. The learned Commissioner of Income Tax (Appeals)-5, Hyderabad, ought to have appreciated the fact that, the transaction of purchase and sale of shares by the appellant is supported with evidence and, therefore, ought to have allowed the total claim of Short Term Capital Loss. 9. The learned Commissioner of Income Tax (Appeals)-5, Hyderabad, erred in observing that, the purchase price of share in excess of Rs.33/- per share is not in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Loss, the learned CIT (A) computed STCL of Rs.42,08,226/- by adopting the cost of purchase of shares of Rs.33/- per share as against the cost of shares claimed by the assessee at Rs.85/- to Rs.108/- per share. 5. Aggrieved by the order of the learned CIT (A), the assessee is in appeal before the Tribunal. 6. The first issue that came up for our consideration from Ground Nos. 1 & 2 of assessee's appeal is disallowance of interest expenditure u/s 14A of the I.T. Act, 1961. The fact with regard to the impugned disputes are that the assessee has borrowed loans from various banks and financial institutions and paid interest. The appellant had also made investment in shares of various companies. The Assessing Officer disallowed interest paid on loan u/s 14A of the Act on the ground that the appellant has utilized interest bearing fund for making investment in shares and securities which yield exempt income. The learned CIT (A) after considering relevant details of loans borrowed from Banks and financial institutions and also investment made in shares and securities of various companies disallowed the proportionate interest relatable to loan fund utilized for purchase of shares and loan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w, there is no error in the reasons given by the learned CIT (A) on this issue to take a contrary view. Thus, we reject the argument of the assessee and uphold the findings of the learned CIT (A). 10. The next issue that came up for our consideration from Ground Nos. 4 to 11 of assessee's appeal is computation of Short-Term Capital Loss from purchase and sale of shares of M/s Shri Vishnu Cements Ltd. The fact with regard to the impugned dispute are that during the relevant A.Y 1999-2000, the appellant has purchased 5,85,300 shares of M/s. SVCL from 3 different parties. The appellant has purchased 3,85,300 shares of SVCL @ Rs.108/- per share on 15.12.1998 from Kalahasteeswar Finance Pvt. Ltd. The appellant had also purchased 43,000 shares @ Rs.85/- per share on 7.9.98 from Bhoopathy Engineering Consultants Pvt Ltd. Similarly, the appellant has purchased 1,50,000/- shares of SVCL @ Rs.90 per share on 4.9.98 from Shri Rampriya Consultants Pvt Ltd. The appellant had sold 5,83,900 shares of SVCL to various parties @ Rs.25 to 33/- per share. The appellant has computed Short-Term Capital Loss of Rs.4,24,29,003/-. The Assessing Officer has disallowed Short- Term Capital Loss derived from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee further referring to the various documents submitted that M/s. SVCL is a group company of Dr B V Raju. The promoter in the process of saving the company from take over has given an open offer to public with the approval of the SEBI for purchase of shares to hold a controlling interest. Since the public are not coming forward to sell their shares, the appellant has bought shares from 3 entitles at higher rate in order to keep controlling interest in the company. Therefore, merely for the reason that sale of said shares resulting into loss, the transaction cannot be treated as arranged transaction. Therefore, he submitted that the Assessing Officer and the learned CIT (A) are erred in recomputing the Short-Term Capital Loss by adopting the cost of purchase at Rs.33/- per share. The learned Counsel for the assessee referring to the decision of the ITAT Hyderabad Benches in the case of Laxmipriya Investments Pvt Ltd vs. DCIT in ITA No.459/Hyd/2003 submitted that the facts of present case and facts of the case before the Tribunal in Laxmipriya Investments (P) Ltd are distinguishable. Therefore, the order of the Tribunal in the above case cannot be considered. Therefore, he submitt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... res to hold controlling interest, then, it would not have sold the shares within a period of 5 months for lesser amount. Further, the learned CIT (A) has brought out clear fact to the effect that the appellant has purchased shares from group entities and also sold shares to group entities. It was further noted that in some cases, consideration for purchase and sale of shares has been adjusted through book entries without any actual payment of consideration by cheque or cash. From the facts brought on record by the Assessing Officer and the learned CIT (A), it is abundantly clear that the transaction of purchase and sale of shares of SVCL is definitely not for acquiring controlling interest in M/s. SVCL, but only for the purpose of booking Short-Term Capital Loss to offset huge capital gain derived by the assessee from sale of shares of Rasi Cements Ltd. Although the appellant tried to justify the transaction as genuine, but on perusal of the relevant dates and events and also parties to the transaction, it is undisputedly clear that the appellant has arranged transaction in collusion with the related parties to book artificial Short-Term Capital Loss to offset huge capital gain der ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he acquisition price. It is also stated that the appellant Company would pay 1 per share to M/s, KIPL towards brokerage. It is also stated that the total number of shares to be acquired by the Appellant company under this MOU would be crystalized upon the final cost of acquiring being determined. It is also stated that the shares would be delivered on or before 20-12-98. It us also mentioned that if, either parties to the MOU not meeting their obligations would be, liable for compensation on account of interest to other party @ 18% p.a. It is also mentioned that either parties to the MOU are eligible for specific performance. It is also mentioned that "any of the terms and conditions of this undertaking can be amended with the written mutual consent of both the parties" 13. From the MOU it is very clear that purchase price fixed was Rs.25 + 8 = Rs. 33/- per share. Against this agreed price, the assessee purchased these shares (@ Rs.1 08/- per share. Even average quotation of share of SVCL was Rs.41.14 per share (as noted Irom Assessing officer's order - para 9). Thus, the crux of the matter to be examined whether the Assessing officer empower to examine whether purchase ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... …." -It may be recalled that the aforesaid words were borrowed and employed in the Indian Act by the Indian Income Tax (Amendment) Act, 1939, from the English Income Tax Act, 1918, corresponding to s. 127 of the English Act of 1952. Before, 1939, the words in the Indian Act were".. any expenditure .. incurred solely for the purpose of earning such profit or gain". The language of the amended s 10(2)(xv) has been retained in the corresponding provision in the I.T Act, 1961 i.e. in s.37 there of. The word "wholly" in the above provision refers to the quantum of expenditure but the word "exclusively" appears to refer to the motive, objective and purpose of the expenditure and in our opinion, gives jurisdiction to the concerned authorities to examine the exp from this standpoint and the contention of the learned Counsel for the assessee that on the findings of the Income Tax Officer contained in Paras (a), (b) and (c) above, the law did not permit him to proceed to scrutinize the expenditure further, is not tenable or acceptable" (emphasis supplied by us). In Swadeshi Cotton Mills Co. Ltd v. CIT (1967) 63 ITR 57, the Supreme Court considered the case of an assessee company w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... actual payment, the Income-tax Officer must hold that the payment was made exclusively and wholly for the purpose of the business. It is manifest that the Income-tax Officer is entitled to examine the circumstances of each case to determine for himself whether the remuneration paid to the employee or any portion thereof was properly deducted under section 10(2)(xu) of the Income-tax Act." The above decision was followed in Lachminarayan Madan Lal v. CIT |1972) 86 ITR 439 (SC). In this case, the payment in respect of which the deduction was claimed had been made to a selling agency firm. The Tribunal found, (i) that on the day the selling agency agreement was executed, the firm had not come into existence; (ii) that the ladies, members of the firm, had no prior business experience; (iii) that the only male adult partner in the firm was a partner in another manufacturing concern situated at a place quite distant from the place where the selling agency business is said to have been carried on; (iv) that the business of the selling agency firm was the same us that of the assessee: (v) that the selling agency firm had no godown of its own nor any transport vehicles. On these findings ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t page 123: "Where an amount paid to an employee pursuant because of "extra commercial considerations", the taxing authority has jurisdiction to disallow a part of the amount as expenditure not incurred wholly and exclusively for the purpose of the business. The earlier decision in Swadeshi Collon Mils Co. Ltd. v. CIT(1967) 63 ITR 57 (SC) was referred to and followed. In CIT v. Travancore Sugars and Chemicals Ltd (1973) 88 ITR 1 (S.C) the Supreme Court, dealing with the test of commercial expediency, held at page 10 as follows: "In considering the nature of the expenditure incurred in the discharge of an obligation under a contract or a statute or a decree or some similar binding covenant, one must avoid being caught in the maze of judicial decisions rendered on different facts and which always present distinguishing features for a comparison with the facts and circumstances of the case in hand. Nor would it be conducive for clarity or for reaching a logical result if we were to concentrate on the facts of the decided cases with a view to match the colour of that case with that of the case which requires determination. The surer way of arriving at a just conclusion would be t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purpose for which, the expenses are incurred and the object which it sought to be achieved for incurring those expenses". In Amritlal and Co. Pvt. Ltd. v. CIT |1977] 108 ITR 719, Bench of the Bombay High Court considered the argument of the assessee that a commission paid to the two directors and four salesmen under a resolution of the Company should be allowed as a deduction without any further scrutiny: The court held that the mere fact that the assessee-company should be allowed as a deduction without any further scrutiny. The Court held that the mere fact assessee- company had proved that the payment had been "made could not carry the matter would not be sufficient to entitle it to claim a deduction. After considering a number of decisions on the subject, the Court held at Page No.736: "In the first place, the payment of commission is disproportionately high as compared to their salaries and, secondly, no trade practice had been pointed out by the assessee company in support of the commission paid. ln other words, the expenditure incurred cannot be said to have satisfied the requirements of the proviso of cl (x) of sub- section (2) of s. 10." In J.K. Steel & In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is supplied). 16. In the light of the above discussion, we examine the facts of the instant case. We find that the Assessing Officer has power to examine the excessive or unreasonable and purchase price not paid in accordance with commercial expediency for purchase of shares of SVCL. In other words, the revenue authorities are duty bound to determine a fair and reasonable profit/income/loss in accordance with law. We, therefore, do not find submission of learned AR in this regard that the revenue authorities have no power to examine excessiveness of the expenditure/purchase price of the shares. 17. Now issue remained to examine is disallowance of excess unreasonable purchased price of shares determined by lower authorities is reasonable or not ? In the case under consideration, the Assessing Officer determine purchase price of shares on the basis of prevailing rate of shares in market, where as, the CIT (A) was of the view that the rate of purchase of shares of SVCL should be in accordance with MOU. When basis of determination of assessee is not acceptable, the Assessing Officer empower to exercise power for estimation. But, when the authorities making such estimation, it must ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r took into consideration a number of circumstances which have already ben tabulated above. The estimate as such cannot be said to be arbitrary, capricious or conjectural. It is supported by the relevant materials on the record. The questions raised are mostly of fact and those which have a semblance of questions of law, are based upon misreading of the order of the Income Tax Officer". 19. In the case under consideration, we find that there is no material available on record nor the assessee pointed out that action of revenue authorities was dishonest or vindictively or capriciously. They taken the same what they honestly believes to be a fair estimate of the proper figure of assessment. 20. Now we consider the judgments cited by the learned AR. We do not see how these decisions help to the case of the assessee. The Apex Court in the case of JK Woollen Manufactures 72 ITR 612 (SC) clearly held that it is open to the Tribunal to come to a conclusion either that the alleged payment is not real or that it is not incurred by the assessee though it is to be adjudged from the point of view of the businessman and not of the IT Department. In the case under consideration, the issue of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esolution on circulation" was passed on 4.9.98. When the learned CIT (A) conveyed his finding to the assessee it was argued that even without the resolution dated 4.9.98, the appellant Company could have agreed to purchase the shares @ Rs. 108/- per share and the department cannot question the business discretion of the appellant. It is further argued that having agreed to purchase the shares at the open offer price plus cost, it was not possible to go back and refuse to take delivery of the shares @ Rs. 108/- per share. It was also submitted that that having made an huge advance of Rs. 5.17 crores, if the appellant had refused to purchase the shares, there would have been a legal battle in the Court and the appellant would not have got back Rs. 3.1 crores. As against this option, it was submitted, that the appellant had agreed to purchase the shares @ Rs. 108/- per share. The CIT (A) considered, the submission. The CIT (A) noticed that even though, there is no cross holding, cross directorship or cross company shareholding", it is noticed, that the, appellant company is a group company of Dr. Raju and the transactions of the appellant company were conducted according to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8, "revising" the share price, the average market quotation of HSE was Rs,87.80. In these circumstances, will a company would have agreed to purchase the Shares @ Rs. 108/- per share? Unless, the assessee company have some other motive other than commercial expediency or unless the assessee company wanted to incur losses, the assessee company would not have agreed to purchase the shares @ Rs.108/- per share. The argument that the appellant company could not have recovered the advance of Rs.5.17 Crore, would have appealed, had the parties to the transactions were not group companies. In the case of the appellant, both the Companies are the group companies and, therefore, this argument does not cut much ice. We agree with the findings of the CIT (A) that it cannot also ignore the fact that the appellant company had made huge gains on sale of RCL Shars in the beginning of the financial year and making the appellant to incur huge losses would benefit the group. Also alive to the fact that there no such huge capital gain in the hands of M/s. KFPL and making M/s. KFPL to bear the loss would not have made any "tax sense". In these circumstances, we hold that the appell ..... X X X X Extracts X X X X X X X X Extracts X X X X
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