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TMI Blog2003 (2) TMI 160X X X X Extracts X X X X X X X X Extracts X X X X ..... e is related to the disallowance of capital loss of Rs. 1,68,12,637. The facts related to this issue has emerged out of the orders of the authorities below are as follows: 3.1 A company, named Keventer Agro Ltd., hereinafter referred to as Keventer was promoted by the assessee-company to take over and run its fruit drinks business. The Industrial Credit Investment Corporation of India Ltd. (ICICI, in short), upon appraisal of fruit drink products, advanced secured loan to Keventer to part finance the product. As on 31-3-1991 the paid up capital of Keventer stood at Rs. 2,50,90,000 divided into 25,09,000 shares of Rs. 10 each. On this date the holding of the assessee-company in the share capital of Keventer was 12,32,000 shares, out of which 3,02,000 shares were directly allotted to the assessee-company and the balance 9,30,000 shares were purchased from Infrastructure Leasing and Financial Securities Ltd. as a part of promoters share capital. The rest of the share capital of Keventer were held by Shri M.K. Jalan, his associates and M.K. Jalan Group Co. The cost of investment of 12,32,000 shares of Keventer, excluding share transfer cost of Rs. 76,421 as shown in the balance-s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alue was purely estimate based and was taken at hypothetical figure of 25% of face value. The loss calculated w.r. to such valuation was also estimated loss. 4. The purpose for which whole of shares of M/s. Keventer Agro Ltd. were sold to its group companies and the purpose for which more or less the same No. of shares of M/s. Keventer Agro Ltd. were purchased back from the same group companies could not be explained convincingly. The reply that sales were made to improve fund position and that the purchases were made again because the management decided it was just a reply for the sake of a reply. The Assessing Officer, therefore, came to the conclusion as follows: - "From the facts and circumstances of the case, the entire series of transactions relating to sale of shares of M/s. Keventer Agro, Ltd. and relating to purchase of shares of M/s. K.A. Ltd. are found to have been arranged with a view to claim huge loss in the case of the assessee company for getting the benefit of set off of such loss in future. By these series of transaction the position of investment of all the other companies remain more or less unaffected as such but the loss results in the books of the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urse open to the assessee-company was to buyback 12,80,000 shares of Keventer from the same five sister companies to whom the shares were also sold by the assessee-company. In short, it was submitted that the transactions of sale and purchase were genuine and as the shares were duly transferred and re-transferred as per rules and regulations, such loss incurred by the assessee in the transaction of sale of shares is allowable and to be carried forward to subsequent years. Having considered the submissions of the assessee-company and going through the written submissions filed before the CIT (A), the CIT (A) decided the matter against the assessee by observing that the assessee-company has failed to establish its bona fides in respect of the alleged share transactions. The CIT (A) has discussed the issue in detail as seen from his order. Still aggrieved, the assessee is in appeal before this Tribunal. 4. Mr. N.K Poddar, the Ld. Sr. Counsel appearing for the assessee has invited our attention to the three volumes of paper books filed before us and as well as to the judicial decisions, copies of which are placed in the paper book. The Ld. counsel for the assessee has raised the foll ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he transaction has to be determined in accordance with the true legal relationship resulting from a transaction. In this connection reliance was placed on the following decisions: (a) CIT v. B.M. Kharwar [1969] 72 ITR 603 (SC) (b) Pandit Lakshmikanta Jha v. CIT [1970] 75 ITR 790 (SC) (c) Chittoor Motor Transport Co. (P.) Ltd v. ITO [1966] 59 ITR 238 (SC) (d) K.N. Narayanan v. ITO [1984] 145 IT.R 373 (Ker.) (e) Abdul Qayume v. CIT [1990] 184 ITR 404 (All.) (f) CIT v. M. Ramaswami [1985] 151 ITR 122 (Mad.) (g) Artex Mfg. Co. v. CIT [1981] 131 ITR 559 (Guj.) (h) K.N. Narayanan v. ITO [1988] 173 ITR 61 (Ker.) (i) Bombay Stem Navigation Co. (1953) (P.) Ltd v. CIT [1965] 56 ITR 52 (SC). (v) It was also explained that the assessee-company admittedly had no capital gain during the year under consideration and, therefore, no set off was possible during the year under appeal and in the immediately succeeding year too. It was contended that the taxing authorities were not justified in alleging that the transactions of shares in Keventer were entered into by the assessee-company with a view to gain a tax advantage by way of set off in future inasmuch as nobody can predict f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the transactions involving sale and purchase of shares of Keventer were designed to book the losses for potential gain in future. It is, therefore, incorrect to say or conclude that it is not the Assessing Officer's case that the transactions in respect of sale and purchase of shares of Keventer are not genuine, though the CIT(A) has stated in his order that it is not the Assessing Officer's case that the transactions in respect of sale and purchase of shares of Keventer are not genuine but on reading the CIT(A)'s order as a whole and particularly para 3.3 of his order, we find that the CIT(A) has meant to say that the transactions entered into by the assessee could be legally correct but at the same time those can be devised to gain tax advantage which is not lawful. It is not proper to pick a word or two from here and there from one's order and then to arrive at a conclusion which is not at all warranted in the same order. In order to find out the true and correct meaning of one's order the order is to be read as a whole. On reading the Assessing Officer's order as well as the CIT(A)'s order, we find that the department has nowhere accepted the assessee's transaction as genuin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ck agreement the assessee-company purchase 9,30,000 equity shares from ILFSL @ Rs.16.48 per share on 1-8-1991, and the aggregate total consideration of Rs.1,53,24,000 became due and payable by the assessee-company to ILFSL. The total number of shares held by the assessee-company in Keventer were, therefore, 12,32,000 including 9,30,000 equity shares purchased by the assessee-company from ILFSL in terms of the buy back agreement. From the above discussion it is, therefore, crystal clear and not in dispute that the Keventer was promoted by the assessee-company as its 100% subsidiary in order to manufacture the fruit juice drinks by transferring its Agro manufacturing unit to Keventer. It is also not in dispute that all group companies including five buyer companies of M.K Jalan group are sister concerns to each other. 9. Having regard to the totality of the facts and circumstances of this case we have now to see whether the transaction of sale of shares of Keventer to five sister companies and then to buy back the same from the same companies to whom they were previously sold is real and genuine and not sham, bogus or make believe. 10. In this connection, the legal position as em ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hod. (v) A colourable transaction is one, which is seemingly valid, but a feigned or counterfeit transaction entered into for some ulterior purposes. The transaction is to be decided as such by reference to the material or evidence or circumstances of each and every case. (vi) The principle on the matter of tax evasion and tax avoidance as laid down by Hon'ble Supreme Court in a landmark judgment in the case of McDowell Co. Ltd. v. CTO [1985] 154 ITR 148(SC) can have its application only where colourable or artificial devices are adopted and not to the transactions which are otherwise legitimate and are undertaken bona fide in the ordinary course of business. In other words, the McDowell Co.'s case can have its application where the devices though seemingly legal are adopted in collusion or whether devices adopted are not genuine or bona fide but are sham, make believe or camouflaged to escape the liability for the tax or to obtain certain benefit for tax purpose. 11. The contention of the Ld. counsel for the assessee that there is no case for doubting the bona fide of the assessee in first selling the total holding of shares held by it in Keventer and thereafter acquirin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the assessee-company's group and it had influence over them. It is, therefore, clear that the transactions of sale of shares and thereafter acquiring the same back from the same five sister companies is made within the same group. Further, no reason or explanation has also been filed by the assessee-company or otherwise by the five sister companies as to what prompted the five sister companies to purchase the shares of Keventer when it is the assessee's case that the Keventer had been incurring losses since its inception. In the absence of any other reason, it is difficult to imagine a person purchasing the shares of a company which has substantial accumulated losses and its shares were not saleable in the open market and there was no willing buyer as admitted by the assessee-company itself. The observation made by the CIT(A) that there appears to be no business consideration for the five companies first to purchase the shares of Keventer from the assessee-company and thereafter to sell the shares back at the same price after 7-8 months of their purchase, and as such the buyer companies did not make any commercial gain has substantial force in it. It is apparent that the five co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roup companies is against all human probabilities and commercial consideration which otherwise any prudent businessman would not have taken in normal conduct of business. Moreover, the amount raised by the assessee-company by selling the shares was only of Rs.30,80,000 as against the total cost of Rs.1,83,44,100 implying thereby that mere by realising the sum of Rs.30,80,000 the assessee would not have been able to liquidate at least its liability amounting to Rs.1,53,24,000 due and payable by the assessee-company to ILFSL for buying back the 9,30,000 shares of Keventer on 1-8-1991 by the assessee-company from ILFSL as per agreement. On perusal of the assessee-company's account with ILFSL, we find that the assessee-company has been able to discharge and/or pay the dues together with interest payable to ILFSL to the tune of Rs.1,13,28,990 during financial year 1992-93 leaving the balance payable of Rs.11,610 only as on 31-3-1993 though it had admitted by utilising the sum of Rs.15,40,000 only out of sale-proceeds of shares of Keventer sold during the year for this purpose implying thereby that the assessee-company had other substantial and sufficient sources to liquidate its dues pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8 lakhs as against Rs.30.80 lakhs realised by way of sale would go to establish that the initial intention of the assessee-company to reduce its borrowings and interest had lost its significance as the same has been superseded or overtaken by the assessee-company's desire to save the Keventer from losing the benefit of carrying forward its business loss and setting it off against its future business profit and that too at the cost of increasing the assessee-company's own liabilities and borrowings. These two reasons shown by the assessee-company at two stages are contradictory to each other inasmuch as at one point of time the assessee-company was very much anxious to reduce its borrowings and interest burden by selling the total holding of shares in Keventer though at the other point of time the assessee-company had become so serious to save the Keventer from losing the benefit of setting off the brought forward losses against the future profit by repurchasing the shares of Keventer previously sold by it and thereby increasing again its borrowings. It is very much difficult to accept the reasons shown by the assessee-company inasmuch as there did or could arise no occasion, either ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... p of time, i.e., on 10-6-1993 (Rs.16 lakh out of Rs.32.8 lakh) and on 13-9-1994 (balance Rs.16.8 lakh) without charging any interest though the shares were re-transferred in assessee-company's name as early as on 8-3-1993, i.e., much before the exchange of money. 13A. On perusal of transfer deeds in respect of sale of shares by the assessee-company, we find that the transfer deeds were executed by the purchasers in their favour as far as back on 3-6-1992 and 30-6-1992 though it is the assessee's case that the shares were sold on 6-7-1992 when transfer deeds along with share certificates were also delivered by the assessee-company to the respective purchaser; and it, therefore, goes to establish that all these are make believe and arranged affairs. Further, the fact that the transfer deeds executed by the assessee-company in its favour at the time of re-purchasing the shares, were signed by the assessee-company on 8-3-1993 and on the very same day the shares were transferred in the assessee's name in the register of Keventer shows the speed with which sale of shares were transferred and formalities under the companies law were gone through indicating their influence over each othe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pective buyer may reap the benefits of future profitability. Based on such consideration the value per share can be taken at 25 per cent of the face value of the share, which works out to Rs.2.50 per Equity Share of Rs.10 each of Keventer Agro Limited." The other report dated 5-6-1992 of S.R. Batliboi Consultants Co., Chartered Accounts and which is addressed to the Keventer, has determined the value of equity shares of Keventer at Nil as on 31-3-1991 as per Rule 11 of Part-G of Schedule III to the Wealth- tax Act, 1957. From the above it is clear that the said Chartered Accountant Firm has not given any objective criteria as to why 25 per cent of the face value of the share can be taken as value of per share. It is mere a subjective opinion based on future profitability in the light of projection prepared for financial institutions and banks. Therefore, mere because the sale of shares has been made at a price so valued by the Chartered Accountant Firm in the manner as indicated above cannot be a basis to say that there is no reason to doubt the bona fide of the sale transaction. 15. We may also mention that the contention of the Ld. counsel for the assessee that the alleged ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Supreme Court in McDowell Co. Ltd.'s case. The principles emerged from these two decisions are that the bona fide business arrangement with incidental fall out by way of tax benefit can be tolerated but tax avoidance or tax evasion by means of colourable device or make believe transaction and dubious means cannot be recognised. The Hon'ble Gujarat High Court in the case of Banyan Berry has observed that if the acts are unambiguous and bona fide, but results in reduction of tax liability or expectation of tax benefit in future, does not amount to colourable device, dubious method or subterfuge to avoid tax. In other words, we can say that where the transactions effected by the assessee are not bona fide or genuine but are sham, make believe, arranged one and are collusive they can be regarded as hollow and colourable device and are not to be accepted as such by the tax authorities. The facts of the present case, as discussed and observed above, clearly reveal that the transactions of first selling the shares to five sister companies and then acquiring back the same shares from the same five companies during the year under consideration are nothing but a make believe affairs an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... authority dealing with tax matters. When there was no real change whatsoever, the apparent change being the transfer on the surface of shares from the individual to the company, a handmaid of the transferring individual, cannot be overlooked and we are in complete agreement with the view of the taxing authority that there was no real change and transfer claimed was a sham transfer." It was further observed therein:-- "in context of determining whether a transaction is a sham or illusory or a device or a ruse, the income-tax authorities are entitled to penetrate the veil covering it and ascertain the truth. The taxing authorities are not required to put on blinkers while looking at the documents produced before them. They are entitled to look into the surrounding circumstances to find out the reality of the recitals made in the documents. It is the duty of the Court in every case, where ingenuity is expended to avoid taxing and welfare legislations, to get behind the smokescreen and discover the true state of affairs. The Court is not to be satisfied with the form and leave alone the substance of the transactions." (iv) In the case of Smt. Nayantara G. Agrawal v. CIT [1994] 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on) Ac 1956, it was not done in the instant case was also ignored by the Tribunal. The Tribunal failed to take note of the fact that the assessee-company and K tried to claim loss in their respective assessment for tax avoidance by fictitious transactions. Considering, the totality of the facts and in the circumstances of the case, the Tribunal was not correct in law in directing the Assessing Office to allow the share of loss to the assessee-company. (vi) The Income-tax Appellate Tribunal, Mumbai Bench, 'c' in the cast of Bombay Oil Industries Ltd. v. Dy. CIT [2002] 82 ITD 626 (Mum.) having considered the motive and timing of the transaction, commercial point of view and the transactions with a person in whom the assessee found unprotested or obliging medium to put through the series of steps envisaged for claiming the loss had held that the series of steps taken to achieve the desired results was nothing but a sham or collusive and as such the transaction cannot be considered. It was also held therein that there is nothing in sections 45 and 48 of the I.T. Act so as to prevent the income-tax authorities to go behind the apparent to find out the real on the basis of evidences an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s effected by the assessee-company are not bona fide commercial transaction but are sham, bogus unreal, make believe, collusive and artificial arrangement with a mala fide intention to acquire benefit for tax purposes; and (iii) therefore, the effect of the said transaction, though seemingly legal, are fit to be disregarded. 20. In the ultimate analysis we hold that the action of the Assessing Officer, which has been confirmed by the CIT(A), in disallowing the loss of Rs. 1,68,12,637 claimed by the assessee-company was justified and in order. 21. In the result, this ground No.1 is decided against the assessee and the CIT(A)'s order on this issue is upheld. 22. Gr. No.2 reads as under:-- "That the Ld. CIT(A) erred in confirming the disallowance of Rs. 12,31,941 representing interest paid/payable to Infrastructure Leasing Financial Services Ltd. on account of delayed payment of initial purchase consideration by the appellant company in terms of buy back agreement for the shares of Keventer Agro Ltd." At the time of hearing it has been pointed out by the Ld. D.R. that the similar issue held come for consideration before I.T.A.T., 'E' Bench, Calcutta, in the assessee's ow ..... X X X X Extracts X X X X X X X X Extracts X X X X
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