9911796707
TMI Blog1999 (8) TMI 108X X X X Extracts X X X X X X X X Extracts X X X X ..... roceedings under s. 271(1)(c). 2. Briefly the facts are that the assessee-company was incorporated at Ahmedabad on 10th Dec, 1993. It filed its return, of income for asst. yr. 1994-95 declaring an income of Rs. 1,01,866 on 5th Oct., 1995. The return was processed under s. 143(1) of the Act on 21st Nov., 1995. Thereafter, the case was selected for scrutiny and notice under s. 143(2) and 142(1) alongwith the questionnaire were issued to the assessee seeking information with regard to the various items of income shown in the computation of income filed along with the return. The AO found that the assessee has shown the break-up of its income as under: Rs. (i) Interest on stock investment 77,676 (ii) Interest income 1,79,507 (iii) Service charges 25,000 --------- 2,82,183 Less: Expenditure 1,80,297 -------- 1,01,886 -------- The AO also found that the assessee had shown receipt of unsecured loan of Rs. 4,11,04,732 and it als ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... learly stated that the financing company had certain funds and were desirous of achieving optimum investments of the funds. In pursuance to the above agreements, VAL/VIL provided funds to the assessee-company for making applications for allotment of shares in specified public issues as selected by the financing company. 4. During the accounting year relevant to asst. yr. 1994-95 the assessee-company was successful in getting allotment of 1,900 equity shares of Nirma Ltd. and 5,100 partly convertible debentures of Lupins Laboratories Ltd. although it applied for seven public issues as noted by the AO at p 3 of the assessment order: the other companies being Supreme Petrochem Ltd., Binani Zinc Ltd. Torrent Pharmaceuticals Ltd., Federal Bank Ltd. and Delta Industries Ltd. The partly convertible debentures (PCDs) of Lupins Laboratories Ltd. were converted into equal number of shares on allotment i.e. 5,100 and the same were transferred to VAL on 21st Feb., 1994, by passing a journal entry at a price of Rs. 118 per share. Part B of those PCDs consisting of NCDs (Khokha) only were transferred by another journal entry on 21st Feb., 1994, at a price of Rs. 182 per NCD. Similarly 1,900 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (f) That the transactions were therefore, colourable transactions, entered into with a view to avoid payment of tax in the hands of the right person and hence the ratio of the Supreme Court decision in the case of McDowell Co. Ltd. vs. CTO (1985) 47 CTR (SC) 126 : (1985) 154 ITR 148 (SC), would apply to the case of the appellant. 5. On appeal by the assessee, the learned CIT(A) upheld the action of the AO for the reasons given in the impugned order. 6. The assessee is aggrieved and has filed this appeal. The learned authorised representative of the assessee submitted that the AO has sought to tax the income of Rs. 19,00,500 in the hands of the assessee by raising various issues and the CIT(A) has confirmed the said finding. The issues involved and the submissions of the learned authorised representative of the assessee are as under: Legality of the transactions and its effect: According to the AO the transactions between the assessee and VIL/VAL are illegal and, therefore, the profits earned by VIL/VAL is deemed to have been earned by the assessee. According to the AO the agreements entered into between VIL/VAL and the assessee was in contravention of the Benami Transa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... filing appropriate form in the office of the Registrar of Companies making a declaration as to the beneficial interest in the shares held by VIL/VAL. It was submitted that this provision cannot apply inasmuch as the law obliges a person to file such declaration within 30 days and in the present case immediately on receipt of shares, they were transferred to VIL/VAL and, therefore, there was no occasion to file such form. Accordingly it was pleaded that no provision of law is contravened by these transactions and as such any attempt to tax the income earned by VIL/VAL in the hands of the assessee on the ground of alleged breach of law, is totally misconceived. However, it was further submitted that assuming (while denying) that the transaction is illegal, that does not mean that the AO has a right to displace the transaction and tax the assessee only on that ground. It was pleaded that if there is a breach of any law, the appropriate authority may take appropriate action but the same has no bearing on assessment of income. Reliance was placed on the decisions of the Supreme Court in the cases of CIT vs. Piara Singh (1980) 17 CTR (SC) 111 : (1980) 124 ITR 40 (SC) and CIT vs. S.C. K ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6.4. It was submitted that the AO has emphasized that VIL/VAL are not liable to pay tax. However, this is factually incorrect because VIL has taxable income as noted by the AO at page 30 of the assessment order. Similarly VAL although has no taxable income for asst. yr. 1994-95, it has taxable income for asst. yr. 1995-96. However, it was submitted that this issue is irrelevant for the simple reason whether or not VIL/VAL has any liability because the profit has actually been earned by VIL/VAL and is required to be taxed in their hands as the funds which generated this income belonged to VIL/VAL. 6.5. It was submitted that the undisputed facts are that the assessee transferred the shares to VIL/VAL at cost and it is also undisputed that VIL/VAL transferred these shares in the market and made profits out of the said transfer. Such profits can be regarded as belonging to the assessee if and only if a view is taken that: (i) though the transfer by the assessee to VIL/VAL is at cost, the AO is entitled to substitute for the cost, market value of shares, or (ii) the transfer is to be ignored being contrary to law and, therefore, the assessee continued to be the owner of the shares ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the CIT(A) is not only opposed to law but opposed to equity. Accordingly it was submitted that the addition of Rs. 19,00,500 is required to be deleted from the hands of the assessee. 7. The learned Departmental Representative strongly relied on the order of the AO as confirmed by the CIT(A). It was submitted by the learned Departmental Representative that the conduct of Videocon Group of Industries smacks of violation of various laws from the very beginning. It was submitted that a front is created by floating various companies at different places viz. Ahmedabad, Bombay and Delhi to obtain the maximum allotment of shares in public issues which would have been otherwise not possible. When the rules and regulations applicable for allotment of shares provide that a single person should apply in one application, is the same being not circumvented by creating the facade of so many companies? Is the arrangement of so-called agreements between the investment companies and VIL/VAL not violative of Securities Exchange (Regulation) Act? It was pleaded that all these acts of the assessee-company in collaboration with VIL/VAL are opposed to public policy and the assessee cannot be allowed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... companies i.e. VIL/VAL and account for all accruing benefits thereof to the financing companies i.e. VIL/VAL. All investments were to be treated as belonging to the financing companies i.e. VIL/VAL and the fund manager was to inform the financing companies all the details of the amounts invested, mode and type of investments and time aspect of realisation and the expected returns and so on. For the above service, the fund manager was entitled to service charges of the amount specified in the agreements. It is undisputed that the funds necessary for investment in the shares of Lupin Laboratories Ltd. and Nirma Ltd. had been provided by the respective financing companies i.e. VIL/VAL as per the agreements. The shares were allotted to the assessee and were transferred to VIL/VAL at cost as per the agreements and thereafter these shares were sold by the financing companies i.e. VIL/VAL and the profits realised therefrom were disclosed by VIL/VAL in their respective income-tax returns. The assessee has also disclosed the service charges received as per the agreements in its return of income. It would, therefore, be seen that the parties have acted according to the terms and conditions o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... right to displace the transactions and tax the assessee only on that ground. If there is a breach of any law, the Appropriate Authority may take appropriate action for that breach, but the same will have no bearing on the assessment of income in view of the decision of the Supreme Court in the case of CIT vs. Piara Singh. The assessment of income therefore, cannot undergo a change depending upon the legality or otherwise of the transactions. 8.3. The assessee has given complete commercial rationale of the agreements in the preamble of these agreements viz. VIL/VAL had funds. They could not have, on their own, made large number of applications in public issues. Therefore, various applications were made through the assessee and other such investment companies for and on behalf of and for the benefit of VIL/VAL. The profits, if any, on such transactions must necessarily belong to VIL/VAL; so also the losses. For making applications the assessee-company was to get fees as service charges. In fact, law as also equity demand that the profits must go to VIL/VAL because the profits were generated only with the help of funds which belonged to VIL/VAL and except for making an application ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s really belonged to the assessee. The above finding is contrary to well settled law and irrespective of the decision whether transactions/agreements between the assessee and VIL/VAL were legal or illegal, proper or improper, the inevitable conclusion is that having transferred the shares to VIL/VAL at cost, the profits on subsequent transfer of shares by VIL/VAL belongs to them only and not to the assessee. The AO can regard that profit as belonging to the assessee if and only if a view is taken that: (i) though the transfer by the assessee to VIL/VAL is at cost, the Department is entitled to substitute for the cost, market value of shares. (ii) The transfer has to be ignored being contrary to law and therefore, the assessee continue to be the owner of the shares and therefore, when VIL/VAL transferred the shares, in reality it was transfer by the assessee and therefore, the profits would belong to the assessee. Both the above propositions are misconceived and contrary to the well settled legal position. As far as the first proposition is concerned, the law does not oblige a trader to transfer the assets at the maximum price and the mere fact that the transfer is made at a p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eld that irrespective of the finding as to whether arrangement between the assessee and VIL/VAL, be legal or illegal, the transactions between them having been completed on transfer of shares by the assessee to VIL/VAL, the chapter is closed. The assessee is not entitled to contend that the transactions be undone and if the question arises as to who is the owner of the property, the only possible view is that the shares belong to VIL/VAL and thereafter if VIL/VAL have earned profits on transfer of such shares, the profits must belong to them and the assessee can never have any claim over the same. Accordingly, the issue raised by the assessee in ground of appeal Nos. 1 to 11 is adjudicated in favour of the assessee and against the Revenue and the addition of Rs. 19,00,500 is directed to be deleted. 9. Coming to ground of appeal No. 12 relating to the addition of Rs. 2,92,274, the AO has discussed the issue in paras 16 to 16.3 of the impugned order as under: "16. Interest on term deposits: 16.1. In its P L a/c the assessee has shown an interest income of Rs. 1,17,728 as interest on Term Deposit kept with Federal Bank, Fort Branch, Mumbai for the purpose of obtaining stock inve ..... X X X X Extracts X X X X X X X X Extracts X X X X
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