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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 ..... A have no application and, therefore ought to have allowed the entire claim of interest payment on borrowed funds amounting to Rs.35,60,747/- or alternatively the entire amount ought to have considered the cost of shares and deduction shall be provided from the sale consideration of shares while arriving Short Term Capital Loss. 4. The learned Commissioner of Income Tax (Appeals)-5, Hyderabad, erred in allowing the Short Term Capital loss of Rs.42,08,226 against the appellant total claim of Rs.4,24,29,033. 5. The learned Commissioner of Income Tax (Appeals)-5, Hyderabad, ought to have allowed the entire Short Term Capital loss of Rs.4,24,29,033 as claimed 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, Hy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er equity shares of Shri Vishnu Cements Ltd (SVCL) and also relating to disallowance of interest. In consequence to the directions given by the ITAT, the learned CIT (A) vide its order dated 28.09.2017 in appeal No.1671/2015-16 partly allowed the appeal filed by the assessee, where the learned CIT (A) allowed partial relief in respect of disallowance of interest expenditure u/s 14A of the Act and out of the total disallowance made by the Assessing Officer towards interest expenditure of Rs.35,16,777/- allowed relief to the extent of Rs.9,81,105/-and sustained the addition to the extent of Rs.25,79,642/-.As regards computation of Short-Term Capital 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 assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Assessing Officer to sustain the addition to the extent of Rs.25,79,642/-, but on perusal of the reasons given by the assessee, in our considered view, the assessee could not substantiate its argument that the investments in shares of other companies is for strategic business purpose is not provided with relevant evidences. On the contrary, the assessee itself has admitted fact that the interest bearing funds has been used for investment in shares and also for non-business purpose. The learned CIT (A) after considering the relevant facts has rightly sustained disallowance of interest to the extent of Rs.25,79,642/- and thus, in our considered view, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee and M/s. Kalahasteeswar Finance Pvt. Ltd. The learned Counsel for the assessee further referring to the similar transaction entered into by promoter of the appellant company and India Cements Ltd for purchase of shares of Rasi Cements Ltd in an open offer submitted that when the market quotation of shares of RCL was at Rs.162/- per share, the appellant has sold said shares at Rs.300/- per shares on bulk basis and if we go by the above transaction, the transaction of the appellant in buying shares from 3 entities at higher rate and selling the same shares at lower rate cannot be treated as arranged transaction. The learned Counsel for the assessee 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r share. Further, the appellant has purchased shares in the month of September and December, 1998 and claimed that the reasons for purchase of shares from 3 entities is to acquire controlling interest in the company M/s. SVCL. The appellant had sold 5,83,900 shares in the month of January to March, 1999 i.e. within a period 5 months @ Rs.25/- to Rs.33/- per share to 10 related parties. If the claim of the appellant is correct that it has acquired shares from public and other group entities for holding controlling interest in M/s. SVCL, then why it has sold the shares within a period of 5 months is not explained. If at all the assessee purchased shares 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nding (MOU) with M/s. Kalapasteeswar Finance (P) Ltd. (KFPL), a group company dated 3-8-1998 for purchase of shares of SVCL. The relevant portion of above agreement reproduced as under from the order of CIT (A) at para 2.5 al page 7 as under : "According to this MOU, the appellant company would invest a Sum of Rs. 5 crores for the purpose of acquiring M/s. SVCL shares and the acquisition price would be Rs. 25/- per share. According to clause 5 of the MOU, the cost of acquiring the shares would be aggregated and divided on the number of shares acquired and cost per share would be worked Out and Rs. the procurement, cost would be loaded into the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Revenue. We, therefore, did not go into examination of this issue in detail. The Revenue make out the case only in respect of impugned transaction of excess and unreasonable payment or purchase price of shares of SVCL. We, therefore, concentrate our examination and finding on this issue only. For examining this issue, we would like to have a discussion referring the following judgment of Delhi High Court in the case of Siddho Mal & Sons vs ITO (Delhi) 122 ITR 839 (Delhi) held as under: "The words falling for interpretation in the above provision are "... expended wholly and exclusively for the purpose of the business...." -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 expe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lity of an allowance claimed is one of law. It is for example open lo the assessee to contend that the decision arrived at by the income-tax authorities was based on no evidence at all. If the assessee satisfies the court that the decision of the income- tax authorities is based on no evidence then the question at issue becomes 01e of law and the court would be entitled to say that the decision of the Income-tax Officer is defective in law. But, as we have already stated, it is not open to the assessee to contend that merely because of existence of an agreement between the employer and the employee and the fact of 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 sel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... High Court was justified in not calling for a statement of case under sub- section (2) of section 256." In Bengal Enamel. Works Ltd. v. CIT/1970) 77 ITR 119, the .Supreme ,Court considered remuneration paid by the assessee to a technical adviser and taking into consideration that the taxing authorities had uniformly found that the remuneration agreed to be paid was influenced by "extra commercial considerations", it being much in excess of what was normally payable, rejected the criticism of the assessee that the Tribunal's finding was based on no evidence or was based on irrelevant considerations and held at 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 expen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... atertight compartment so as to be confined in a straight-jacket. The test merely means that the Court will place itself in the position of a businessman and find out whether the expenses incurred could be said to have been laid out for the purpose of the business or the transaction was merely a subterfuge for the purpose of sharing or dividing the profits ascertained in particular manner. It seems to us that on ultimate analysis the matter would depend on the intention of the parties as spell out from the terms of the agreement the nature or the surrounding circumstances, character of the rude or venture, the 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- compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... collusiveness or colorable discretion. Thus, on the one hand it is not nor the ITO to judge whether the assessee could have avoided or reduced a particular expenditure but, on the other, an unreasonably high or excessive expenditure would normally and correctly caution the ITO to examine it more carefully and if combined with other circumstances it leads to the conclusion that the motive behind the expenditure is to unduly benefit someone, the ITO is well within his rights to come to a finding that the expenditure is not exclusively for the purposes of business (emphasis 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 rema ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the income of the assessee for the period [rom 1942-43 to 1947-48, by taking the following facts into consideration: (i) the general market condition during the material period; (ii) the admissions made by the assessee before the Investigation Commission and the I.A.C., Central Range, New Delhi; and (iii) the facts found by the Commission. The ITO on these considerations held that the assessee's concealed income from business could be reasonably estimated at Rs.37 lakhs...." .... In making this enhanced estimate, Income Tax Officer 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y cost, there is no logic or reason of commercial expediency in selling SVCL Shares through right arm when the left arm of the group was purchasing the shares. The CIT (A) considered assessee's explanation and noticed that it is wondered as to why the "resolution on circulation" was passed on 4-9-98. On going through the share market quotation of M/s. SVCL Shares in HSE, my doubt got cleared. It was on 4-9-98, the share market quotation of M/s. SVCL had attained its peak of Rs. 90/-. Therefore, no wonder, it is claimed that the "resolution 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, ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t before 22-8-98 / 28-8- 98, the act of M/s. KFPL in upping the offer price does not bind on the appellant. At least, if the market quotation of M/s. SVCL shares had gone up to say around Rs. 1007- at the time of delivery of shares, there would have been some rationale in agreeing to take delivery @ Rs. 00/- per share. However, when the delivery of the shares was given, the prices were hovering around Rs. 41/- per share and the price was not around Rs. 108/- per share. Even on the so called date of resolution viz., 4-9-98, "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, theref ..... X X X X Extracts X X X X X X X X Extracts X X X X
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