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TMI Blog1986 (10) TMI 54X X X X Extracts X X X X X X X X Extracts X X X X ..... ess and office premises of Cellulose as well as at the residential premises of the assessee and others. A number of documents, books of account, loose papers, etc., were found and seized along with cash and valuables. For the present appeal we are mainly concerned with the addition on account of 'capital gain' computed by the ITO on the transfer of 491 shares of Gujchem being the capital contribution in a firm Maitreya Corpn. The assessee in the course of assessment proceedings claimed that shares of companies held by him as an 'investment' had been converted into stock-in-trade on 30-8-1980. An application under section 144A of the Act was also filed before the learned IAC requesting for issue of suitable direction to the ITO in connection with the claim. It is observed from the order of the ITO that the IAC accepted the claim of the assessee effecting conversion of shares earlier held as investment into stock-in-trade with effect from 30-8-1980 with the exception of the shares of the following three companies : (i) Cellulose Products of India Ltd. (ii) Gujchem Distillers India Ltd. (iii) Manish Organics India Ltd. 4. As a result of the aforesaid directions of the IAC wher ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The arguments of the learned counsel for the assessee appear on pages 8 to 22 of the order of the Commissioner (Appeals) (paras 11 to 14) whereas the arguments of the learned senior standing counsel appear at pages 22 to 30 (paras 13 to 19). The reply of the counsel for the assessee appears in paras 20-25 at pages 30 to 37 of the order. The arguments on behalf of the assessee were advanced on the following aspects : (i) Facts (ii) Tests for determining genuineness of business (iii) Department's case (iv) Appellant's case (v) Contents of appellant's paper book (vi) Relevance of seized papers (vii) Case law. The arguments on behalf of the revenue proceeded on the following lines : (i) Submissions based on law and accountancy principles (ii) Emphasis on seized papers (iii) Factual aspects of the case (iv) Position of law. 8. We do not propose to repeat here the detailed arguments advanced by both the sides before the Commissioner (Appeals) but only do so in the form of a summary to bring out the nature of the controversy. The arguments of the learned counsel of the assessee proceeded on the following lines : (1) That the assessee had made a clear and unequ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of shares was nothing but a device for avoidance and tax evasion. That the matter was to be considered from a perusal of the total facts and circumstances and not from a narrow point of view. That the seized papers should not be given undue prominence since they merely reflected certain opinions sought by way of clarification by members of a group on various problems that could arise if a separation took place amongst the members. (10) That the papers relating to the family arrangement seized during the search had nothing to do with the controversy at issue since these papers had not been acted upon in full as per the terms outlined therein. On the other hand, there were many deviations such as : (i) Shares of Cellulose and Gujchem were to be transferred in 7 equal instalments before 31-1-1987 but in fact no shares were transferred even till 31-12-1983. (ii) Shares of Manish were to be transferred latest by 31-1-1982 and at the price of Rs. 10 per share but the transfer went on uptil 1983 and not at Rs. 10 but the prevailing market price. (iii) Shares of Cellulose and Gujchem were introduced in firms and AOPs instead of the direct transfer stipulated in the memorandum of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d senior standing counsel as well as the solicitor who appeared on behalf of the department argued at length. These submissions are summarised as under : (1) That it is the substance and not the form which is to be seen. That the conversion of shares into stock-in-trade was not genuine but a mere device to transfer the shares of companies controlled by the assessee and his family members and the main motive was to avoid tax. (2) That the shares of the three companies under consideration formed part of the controlling interest of the assessee and his family members over these companies. For this proposition reliance was placed on various accountancy principles as well as company law authorities. That this controlling interest was of considerable significance to the assessee and members of his family and they could have never thought of liquidating the same. (3) That the conversion of shares into stock-in-trade was done with the sole motive of inter se transferring shares between the two groups of family members. (4) That the assessee and his family members had planned a very elaborate and cleverly designed device, for avoidance and evasion of tax. (5) That the evidence put ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with a view to achieve a family separation and could not be treated as genuine was not correct. That the genuineness of the conversion was to be judged from the conduct of the assessee and the totality of the circumstances. (7) That if along with the conduct of the genuine business of dealing in shares the assessee could achieve a family arrangement there was nothing wrong or impermissible in law to do so. The right of an assessee to undertake tax planning should not be looked upon with bias or prejudice. 13. We would at this stage refer to the controversy that arose between the two sides since it was contended by the senior standing counsel that the counsel for the assessee was taking a stand which had not been taken before the ITO and the IAC. This was regarding the family arrangement and the contention of the assessee's counsel that it had not been acted upon ; whereas the senior standing counsel contended that the assessee and members of his group were bound by the agreement. An attempt was also made by the revenue to summon various persons as witnesses and a written request was made to the Commissioner (Appeals). This was resisted by the counsel of the assessee as accordin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the open market. If, for example, the shares which were converted by the appellant were the shares of private company which cannot be freely dealt with in the open market under the provisions of the company law, it would have been a different case altogether. But, under the circumstances and in the facts of the appellant's case and in the light of the logical and convincing submissions made on his behalf, I am unable to agree with the views put forward by the learned standing counsel as also the relevant observations of the learned IAC in his directions under section 144A. " (2) Whether on the totality of the facts and in the circumstances of the case it could be said that the shares of the three companies were actually converted into stock-in-trade of the business of dealing in shares and whether the assessee had in fact carried on such business ? " The entire facts and sequence of events as narrated by the counsel for the appellant in their submissions contained hereinbefore in para 11 have not been basically challenged or disputed by the department. " The learned Commissioner (Appeals) thereafter referred to the decision in the case of P.M. Mohammed Meerakhan v. CIT [19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in shares. " (3) Whether the seized papers on record go to prove that the business of dealing in shares was sham ? " The first point that strikes to the mind is that if as claimed by the department, conversion of shares into stock-in-trade was done merely and solely with the motive of transferring shares between the two groups inter se, then the department would definitely not have accepted the conversion in relation to the shares other than the three companies, viz., Cellulose Products of India Ltd., Gujchem Distillers India Ltd. and Manish Organics India Ltd. which were accepted as such as genuine by the learned ITO and the IAC. If the department really wanted to say that the conversion was a pretence then it would have alleged that the pretence was as a whole and not in part as attempted to be claimed before me. I find force in the submissions of the counsels for the appellant that if along with conducting of genuine business of dealing in shares, the appellant could incidentally achieve the family arrangement, there was nothing wrong or impermissible in law in doing so. " Having a glance at the volume of business done in the proprietary business set of dealing in shares o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ether conversion of shares into stock-in-trade was a mere device or arrangement to avoid tax ? " It is, therefore, clear, that even if the scheme of family arrangement was a device or an arrangement, there was certainly no motive for tax evasion which can be attributed to the appellant and the members of his group. The charge of the ITO and IAC against the appellant that the conversion was planned with a view to avoid tax should not hold any good even if it is presumed for a moment that the appellant had any such motives or intention. Therefore, the conversion of shares into stock-in-trade cannot be rejected on the ground that it was a mere device or an arrangement to avoid tax. " 15. The learned Commissioner (Appeals) then finally summed up the four aspects of the matter as under : " In view of the conclusion arising out of the four posers raised above, I hold that the claim of the appellant in respect of conversion of shares of Cellulose Products of India Ltd., Gujchem Distillers India Ltd. and Manish Organics India Ltd. held as capital assets into stock-in-trade should be accepted and allowed. Once this is done, the question of the applicability of the decision of the Gu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mitting additional evidence without recording his reasons for doing so and also in not giving an opportunity to the ITO. It was contended that rule 46A of the Income-tax Rules, 1962 ('the Rules') was mandatory as even held by the Hon'ble Gujarat High Court in the case of CIT v. Valimohmed Ahmedbhai [1982] 134 ITR 214. He also referred to various other judgments to contend that it was mandatory to record reasons before issuing notices under section 148 or where under rule 112 of the Rules recording of reasons for carrying out a search was held to be mandatory. These judgments were : CIT v. Thakuirlal [1981] 132 ITR 398 (MP), Pooran Mal v. Director of Inspection (Investigation [1974] 93 ITR 505, 508 (SC), Jamna Lal Kabra v. ITO [1968] 69 ITR 461 (All.) and CIT v. T.R. Rajakumari [1974] 96 ITR 78 (Mid.). 18. As regards the nature of documents which were termed as additional evidence the learned standing counsel referred to pages 1 to 5 of his paper book which contained correspondence between the ITO and the Commissioner (Appeals) on the one hand and the IAC and the Commissioner (Appeals) on the other. It was contended that information regarding the business done by the firm Maitre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arned counsel then contended that the question of filing fresh evidence had arisen before the learned Commissioner (Appeals) as well and the matter had been settled by him vide para 25 of his order. We would at this stage reproduce the aforesaid para : " 25. Before dealing with the application, Shri K.C. Patel and Shri Mukesh M. Patel, the counsels for the appellant were categorically asked whether they were introducing at this stage fresh evidence or relying on any new facts not earlier placed at the time of assessment. The counsels answered this question in the negative. The senior standing counsel, Shri B.R. Shah, was also confronted with the objections raised by Shri K.C. Patel against the application presented by him. He had no satisfactory reply to offer to the point that the IAC already had an occasion to apply his mind on the aspects mentioned to be investigated in the application. The appellant cannot be banned from raising his own interpretation and analysis of facts as sought to be done in the instant case. In view of this very material fact and the fact that the appellant himself was not leading any new evidence as confirmed by his two counsels, the necessity of enter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e advanced detailed arguments which were substantially on the lines as argued by his predecessor before the Commissioner (Appeals). In addition he reiterated the following : (1) That there was no real intention to deal in the shares of the three companies under consideration. The only idea was to bifurcate these companies into two family groups and in doing so capital gains tax was sought to be avoided. (2) That the idea of converting the shares into stock-in-trade and putting them in the firm was only to facilitate their transfer to the other group. This was so since only shares which had to go to the other group (not the assessee's group) were put into the partnership and not the shares which the assessee's group had to control. (3) That even if shares were converted into stock-in-trade there must be clear intention to trade. That such trading in other scripts was not important to determine whether the assessee was a trader or not in respect of the three scripts under consideration. (4) That the assessee has not effected any sale or purchase of Cellulose shares but only that of Gujchem which is to go to the other group under the family arrangement. (5) That the value of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... length on the various aspects of the case. His arguments were also on the same lines as urged before the Commissioner (Appeals) and we do not repeat them here. We, however, mention some of the main issues highlighted by him in the course of his arguments. These are : (1) That the declaration regarding conversion of shares into stock-in-trade is composite in nature and cannot be challenged by bifurcating it. (2) The entire investment portfolio has been thrown into the business portfolio. (3) The assessee has got separate staff to carry on the business of dealing in shares. (4) The assessee continues to carry on the business of trading in shares till date. (5) That even the infrequency of transactions means an application of a business mind. (6) That main object was to have a family arrangement (not tax evasion) which is a normal thing in big business houses. (7) There is no bar on selling shares which forms part of the controlling interest. (8) That the memorandum of family arrangement dated 1-2-1980 has not been followed in many important aspects. The shares of Gujchem and Cellulose had to be transferred from one group to the other between the period 1-2-1980 to 31 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ] 132 ITR 159 (Guj.), CIT v. Ramniklal Kothari [1969] 74 ITR 57 (SC) and Dr. Gaur Hari Singhania v. ITO [1986] 16 ITD 1 (Bom.) (SB). It was contended that the principles which emerged were : (1) The decision in the case of McDowell Co. Ltd. does not apply to him as his transaction is within the four corners of law. On the other hand, it supported 'tax planning' which was legitimate. (2) The business of a firm is the business of the partner provided it was similar in nature. (3) That a scheme of 'family arrangement' was permissible under law. (4) That once the ITO had accepted the returned income of Rs. 1,300 from trading in shares it meant an acceptance of the business as a whole and which included the conversion from the investment portfolio to the trading portfolio (page 8 of the assessee's paper book). 32. The learned counsel finally concluded his arguments by distinguishing W. T. Ramsay Ltd.'s case and urging that the order of the Commissioner (Appeals) deserved to be upheld inasmuch as the revenue had not been able to prove that the transaction under consideration had been entered into for the purposes of evading tax or that it was a sham transaction. 33. The l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esult into payment of gift-tax and/or capital gains tax by the transferor although the benefit may go to the transferee. If an agreement is made between the family members to transfer the shares at a price fixed now then it may not attract capital gains tax but it may attract gift-tax on the excess value which may be quoted on a subsequent date. If the market value of shares transferred at fixed price is lower than the fixed price then the transferee may become liable to pay gift-tax instead of the transferor. The principle to be laid down now is that gift-tax or whatever tax is paid will be reimbursed to the person liable to pay the tax by the other person, i.e., transferor or transferee of the shares as the case may be. It is for consideration as to whether the inter se transfers should be effected in one year or over a period of time. The practical difficulties in deferring the transfers are stated above. An additional question would be the sharing of the burden of capital gains tax. If the first course of one time sale is adopted, it would only lead to the question of capital gains tax. As the prices of the shares of CPIL/GDIL for determining the sale price of Rs. 250 per s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... may be higher or lower at the time of the actual transfer. The question of capital gains tax or gift-tax on the difference between the market price and the agreed fixed price should not ordinarily arise because these prices are fixed under an agreement of family arrangement and is not a transfer for any other consideration like avoidance or evasion of tax. However, in case any such question arises, the transferor will have to bear the burden of tax and fight out his case before the higher authorities including the appellate authorities. The parties will bear their respective taxes on the transfers arising out of the family arrangement. " [Emphasis supplied) It may accordingly be seen that at every stage the stress is on minimising the tax effect and not eliminating it altogether. In the meetings held on 7-5-1980 and 31-7-1980 (subsequent to the family arrangement) an attempt has been made to discuss with the help of examples, the effects of the transfer of shares between the groups and on how best to achieve the objective with the minimum of tax impact. The learned standing counsel has also quoted extensively from the same set of documents, but according to us he has not been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e's proprietary business in shares and which has as its starting point the composite entry of conversion of the investment portfolio into stock-in-trade quantified at Rs. 7,69,324 as well as the entry for transfer of shares to Maitreya Corpn. at Rs. 1,27,880 (page 8 of the paper book). In fact the proprietary business of dealing in shares stands accepted. 37. We were informed by the learned standing counsel on behalf of the revenue that the tax effect in the case of the assessee and the other members of the group is of a substantial amount running into lakhs of rupees in case the department's stand is accepted. We wonder whether a 'family arrangement' can lead to such staggering results by treating it as a sham device ? According to us, the revenue cannot stand to benefit from such a family arrangement where tax evasion is not the motive at all. 38. We also note as a fact that there are more deviations from the terms of the family arrangement rather than compliance with it. Even the IAC has observed that 'it is not the department's case that the family arrangement is a rigid unalterable charter'. This being an accepted fact the revenue cannot seek to penalise the assessee on th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpany on behalf of the assessee from Rs. 2,490 to Rs. 500. 13. The Commissioner (Appeals) erred in law and on facts in relying on his addition for personal use of motor car allotted by the company should be made according to table given in rule 3(C)(ii). He further erred in reducing the addition by Rs. 8,374. 43. We are informed by the learned counsel for the assessee that all the three issues are covered in favour of the assessee by the order of the Tribunal in the case of the assessee himself for the immediately preceding year, viz., 1980-81 in IT Appeal No. 1407 (Ahd.) of 1984 dated 4-1-1985. The learned standing counsel fairly admitted this position. 44. As regards ground No. 11 we on the basis of the reasoning given in para 10 of the order of the Tribunal reject the same. As regards ground No. 12 we uphold the order of the Commissioner (Appeals) whereby he has confirmed an addition of Rs. 500 in respect of perquisite value of telephone although the Tribunal had confirmed deletion of the entire amount in the assessment year 1980-81. Ground No. 13 is also decided against the revenue in view of the decision of the Tribunal in para 4 of their order. 45. As a result, the ap ..... X X X X Extracts X X X X X X X X Extracts X X X X
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