M/S. NAVIN FLUORINE INTERNATIONAL LTD., MUMBAI V. DCIT,CIR-7(1), MUMBAI

CO 187/MUM/2008

• Counselvise Citation: [2015] 123 COUNSELVISE.COM (IT) 1020 (ITAT-MUMBAI)
• Duration Of Justice: 6 year(s) 7 month(s) 26 day(s)
• Appeal Type: Cross Objection
• Pronouncement Date: 12-06-2015
• Appeal Filed By: Assessee
• Bench Allotted: B
• Next Hearing Date: 08-12-2014
• Assessment Year: 2005-2006
• Appeal Filed On: 17-10-2008
• Court: TRIBUNAL
• Department Lawyers: SURINDER JIT SINGH
• Assessee Lawyers: NEELKANTH KHANDELWAL A
• Keywords: Capital asset; Depreciation; Cost of acquisition; Valuation report; Commercial expediency; Revenue expenditure; Capital expenditure
• Section: 37(1)

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH, MUM BAI BEFORE S/SHRI B.R.BASKARAN (AM) AND AMIT SHUKLA, (JM) . . , , ./I.T.A. NO.3747/MUM/2008 ( ! / ASSESSMENT YEAR :2005-06) DY.COMMISSIONER OF INCOME TAX, CIRCLE 7(1), 622, AAYAKAR BHAVAN, M K ROAD, MUMBAI-400020 / VS. M/S NAVIN FLUORINE INTERNATIONAL LTD., KALPATARU POINT, 1 ST FLOOR, KAMANI MARG, SION (E), MUMBAI-400022 ( '# / APPELLANT) .. ( $%'# / RESPONDENT) C O NO.187/MUM/2008 ARISING OUT OF I.T.A. NO.3747/MUM/2008 ( ! / ASSESSMENT YEAR :2005-06) M/S NAVIN FLUORINE INTERNATIONAL LTD., KALPATARU POINT, 1 ST FLOOR, KAMANI MARG, SION (E), MUMBAI-400022 / VS. DY.COMMISSIONER OF INCOME TAX, CIRCLE 7(1), 622, AAYAKAR BHAVAN, M K ROAD, MUMBAI-400020 ( '# / APPELLANT) .. ( $%'# / RESPONDENT) ' ./ <= ./PAN/GIR NO. :AABCPO464B '# > / REVENUE BY SHRI SURINDERJIT SINGH $%'# ? > /ASSESSEE BY S/SHRI RAJIV KHANDELWAL AND NEELKANTH KHANDELWAL @ ? A / DATE OF HEARING : 15.4.2015 BC! ? A /DATE OF PRONOUNCEMENT : 12.6.2015 / O R D E R PER B.R. BASKARAN (AM) THE APPEAL FILED BY THE REVENUE AND THE CROSS OBJE CTION FILED BY THE ASSESSEE ARE DIRECTED AGAINST THE ORDER DATED 25-0 3-2008 PASSED BY LD CIT(A)-VII, MUMBAI AND THEY RELATE TO THE ASSESSMEN T YEAR 2005-06. ITA 3747/MUM/2008 CO NO.187/M/2008 2 2. THE GROUNDS OF APPEAL URGED BY THE REVENUE GIVE RISE TO THE FOLLOWING ISSUES:- (A) CLAIM OF RS.70.86 LAKHS MADE U/S 35(1)(I) OF THE ACT. (B) CLAIM OF RS.5.00 LAKHS MADE U/S 35(1)(II) OF THE ACT. (B) CLAIM RELATING TO FOREIGN AGENCY COMMISSION RS.157.84 LAKHS. (C) RATE OF DEPRECIATION ADMISSIBLE ON SOFTWARE. (D) CLAIM OF SHORT TERM CAPITAL LOSS ARISING ON S ALE OF PREFERENCE SHARES. 3. IN THE CROSS OBJECTION, THE ASSESSEE HAS URGED FOLLOWING ISSUES:- (A) CLAIM OF RS.5.00 LAKHS MADE U/S 35(1)(II) OF THE ACT. (B) CLAIM OF RS.4.17 LAKHS RELATING TO R& D UNITS U/S 35(1)(IV) OF THE ACT. (C) CLAIM OF INTEREST ON SBI-TDR RS.56.17 LAKHS . 4. THE FACTS RELATING TO THE CASE ARE DISCUSSE D IN BRIEF. THE ASSESSEE COMPANY IS ENGAGED IN MANUFACTURING AND TRADING OF CHEMICALS LIKE REFRIGERANT GASES, HYDROFUORIC ACID AND FLUORO CHEM ICALS. THE FIRST ISSUE IN THE APPEAL OF THE REVENUE RELATES TO THE DELETIO N OF ADDITION OF RS.70.86 LAKHS RELATING TO DEDUCTION U/S 35(1)(I) OF THE ACT . THE LD D.R SUBMITTED THAT THE ASSESSING HAS MADE THIS ADDITION ON THE BA SIS OF OBSERVATIONS MADE BY THE AUDITOR IN THE TAX AUDIT REPORT. HE SU BMITTED THAT THE ASSESSEE HAD BOOKED VARIOUS EXPENSES LIKE SALARIES & WAGES, STORES, INSURANCE, REPAIRS, POWER & FUEL ETC. UNDER THE RES PECTIVE HEADS. HENCE TAX AUDITOR HAD REPORTED THAT IT IS DIFFICULT TO DE TERMINE SEPARATELY THE REVENUE EXPENDITURE INCURRED ON SCIENTIFIC RESEARC H AND ACCORDINGLY REPORTED THAT THE ASSESSEE HAS ESTIMATED THE EXPEND ITURE INCURRED ON SCIENTIFIC RESEARCH. HENCE THE AO TOOK THE VIEW TH AT THE EXPENDITURE ITA 3747/MUM/2008 CO NO.187/M/2008 3 CLAIMED BY THE ASSESSEE AS SCIENTIFIC RESEARCH EXP ENSES REMAINED UNVERIFIABLE BY THE AUDITORS AND ACCORDINGLY ADDED THE ABOVE SAID SUM OF RS.70.86 LAKHS TO THE TOTAL INCOME OF THE ASSESSEE. 5. THE LD D.R SUBMITTED THAT THE LD CIT(A) NOTI CED THAT THE AUDITORS HAVE NOT DOUBTED ABOUT THE GENUINENESS OF EXPENSES AND HENCE DIRECTED THE AO TO ALLOW THE EXPENSES U/S 37(1) OF THE ACT. FURTHER IT WAS SEEN THAT THE ASSESSEE HAD CLAIMED EXPENSES UNDER RESPEC TIVE HEADS ONLY AND HENCE THERE WAS NO SEPARATE CLAIM AS SCIENTIFIC RE SEARCH EXPENSES. THE LD D.R ALSO FAIRLY ADMITTED THAT THE ASSESSEE HAS N OT CLAIMED THE SCIENTIFIC RESEARCH EXPENDITURE SEPARATELY U/S 35(1)(I) OF THE ACT. 6. THE LD A.R SUBMITTED THAT THE LD CIT(A) HAS CORRECTLY APPRECIATED THE FACT THAT THE ASSESSEE HAD BOOKED VARIOUS EXPEN SES UNDER VARIOUS HEADS AND THE AUDITOR HAS NOT DOUBTED ABOUT THE GEN UINENESS OF THOSE EXPENSES. THE AUDITOR HAS ONLY STATED THAT THE EXP ENSES INCURRED ON SCIENTIFIC RESEARCH (R & D UNIT) COULD NOT BE SEPAR ATELY ASCERTAINED DUE TO BOOKING OF EXPENSES UNDER RESPECTIVE HEADS. 7. HAVING HEARD RIVAL SUBMISSIONS ON THIS ISSUE , WE ARE OF THE VIEW THAT THE D CIT(A) WAS JUSTIFIED IN DIRECTING THE AO TO A LLOW RS.70.86 LAKHS U/S 37(1) OF THE ACT, SINCE THE AUDITOR HAS ONLY STATED THAT THE EXPENSES INCURRED ON R & D UNIT COULD NOT BE SEPARATELY ASCE RTAINED AND IT HAD TO BE ESTIMATED. THE OBSERVATION MADE BY THE AUDITOR, IN OUR VIEW ALSO, DOES NOT MEAN THAT THE ASSESSEE HAS CLAIMED THE ABOVE SA ID EXPENDITURE ON ESTIMATED BASIS. ACCORDINGLY WE UPHOLD THE ORDER O F LD CIT(A) ON THIS ISSUE. ITA 3747/MUM/2008 CO NO.187/M/2008 4 8. THE SECOND ISSUE URGED BY THE REVENUE RELATE S DEDUCTION ALLOWED BY THE LD CIT(A) U/S 35(1)(II) OF THE ACT ON THE CONTR IBUTION OF RS.5.00 LAKHS MADE TO INDIAN INSTITUTE OF CHEMICAL TECHNOLOGY. T HE ASSESSEE HAD CLAIMED WEIGHTED DEDUCTION @ 125% OF THE CONTRIBUTI ON U/S 35(1)(II) OF THE ACT. THE AO DISALLOWED THE CLAIM ON THE REASON ING THAT THE ASSESSEE DID NOT PRODUCE THE RELEVANT VOUCHER. BEFORE LD CI T(A), THE ASSESSEE FURNISHED THE EVIDENCE AND HENCE THE LD CIT(A) DIRE CTED THE AO TO ALLOW THE ABOVE SAID AMOUNT U/S 37(1) OF THE ACT, BUT DID NOT ALLOW WEIGHTED DEDUCTION. THE REVENUE IS AGGRIEVED BY THE DECISIO N OF LD CIT(A) ON THIS ISSUE AND ALSO IN ADMITTING FRESH EVIDENCE IN VIOLA TION OF RULE 46A OF THE IT RULES. 9. IN THE CROSS OBJECTION, THE ASSESSEE IS CONT ESTING THE DECISION OF LD CIT(A) IN NOT ALLOWING WEIGHTED DEDUCTION AS PROVID ED U/S 35(1)(II) OF THE ACT. 10. WE HEARD THE PARTIES ON THIS ISSUE. SINCE THE REVENUE IS CONTESTING ABOUT THE VIOLATION OF RULE 46A OF THE IT RULES, WE ARE OF THE VIEW THAT THE EVIDENCES FURNISHED BY THE ASSESSEE BEFORE LD CIT(A ) REQUIRES TO BE VERIFIED BY THE AO. ACCORDINGLY, WE SET ASIDE THE ORDER OF THE FIRST APPELLATE AUTHORITY ON THIS ISSUE AND RESTORE THE S AME TO THE FILE OF THE AO. IN THE SET ASIDE PROCEEDINGS, THE AO SHOULD ALSO EX AMINE THE CLAIM OF WEIGHTED DEDUCTION U/S 35(1)(II) OF THE ACT IN RESP ECT OF THE CONTRIBUTION OF RS.5.00 LAKHS REFERRED ABOVE AND TAKE APPROPRIATE D ECISION IN ACCORDANCE WITH THE LAW AFTER HEARING THE ASSESSEE ON THIS ISS UE. 11. THE NEXT ISSUE CONTESTED BY THE REVENUE REL ATES TO THE FOREIGN AGENCY COMMISSION OF RS.157.84 LAKHS DISALLOWED BY THE ASSESSING OFFICER. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE AO ASKED THE ASSESSEE ITA 3747/MUM/2008 CO NO.187/M/2008 5 TO JUSTIFY THE PAYMENT OF FOREIGN AGENCY COMMISSION WITH EVIDENCES ABOUT THE NATURE OF SERVICES RENDERED. HOWEVER, THE ASSE SSEE FURNISHED CREDIT NOTES RAISED BY IT ON THE FOREIGN AGENTS AND THE CO VERING LETTERS FORWARDING DEMAND DRAFTS TOWARDS PAYMENT OF COMMISS ION. BOTH THE DOCUMENTS WERE FOUND TO BE EVIDENCES GENERATED BY T HE ASSESSEE ITSELF AND SINCE THE ASSESSEE DID NOT FURNISH ANY OTHER EV IDENCE, THE AO HELD THAT THE ASSESSEE HAS FAILED TO PROVE THE EXPENDITU RE AND ACCORDINGLY DISALLOWED THE SAME. BEFORE LD CIT(A), THE ASSESSE E FURNISHED DEBIT NOTE RAISED BY SOME OF THE PARTIES. WITH REGARD TO THE OTHER PARTIES, THE ASSESSEE PLACED RELIANCE ON THE CREDIT NOTES ISSUED BY IT AND THE EVIDENCES GIVEN TO PROVE PAYMENTS. 12. THE LD CIT(A) NOTICED THAT THE EVIDENCES FU RNISHED BY THE ASSESSEE SUFFICIENTLY PROVE THAT THERE WAS PAYMENT OF FOREIG N AGENCY COMMISSION. HE FURTHER HELD THAT THE ASSESSING OFFICER HAS NOT BROUGHT ANY MATERIAL TO SHOW THAT THE AGENTS HAVE NOT RENDERED SERVICES TO THE ASSESSEE. WITH THESE OBSERVATIONS, THE LD CIT(A) DELETED THE DISAL LOWANCE. 13. THE LD D.R SUBMITTED THAT THE BURDEN TO PRO VE THE GENUINENESS OF EXPENSES LIE UPON THE ASSESSEE AND IN THE INSTANT C ASE, THE ASSESSEE HAS FAILED TO PROVE THAT THE RECIPIENTS OF ALLEGED COMM ISSION PAYMENTS HAVE RENDERED ANY SERVICE TO THE ASSESSEE. ON THE CONTR ARY, THE LD A.R SUBMITTED THAT THE MAJORITY OF COMMISSION PAYMENT W AS MADE TO M/S ACON LTD (RS.1.19 CRORES OUT OF TOTAL COMMISSION PAYMENT OF RS.1.57 CRORES) AND THE SAID AGENT HAS ACKNOWLEDGED THE RECEIPT OF COMMISSION PAYMENTS. HE FURTHER SUBMITTED SOME MORE AGENTS HAVE ALSO CON FIRMED THE RECEIPT. THE LD A.R FURTHER SUBMITTED THAT THE COMMISSION PA YMENT IS IDENTIFIED WITH PARTICULAR INVOICES AND HENCE THE AO HAS DISAL LOWED THE CLAIM ONLY ON SUSPICION. HE FURTHER SUBMITTED THAT THE COMMISSIO N PAYMENTS ARE MADE ITA 3747/MUM/2008 CO NO.187/M/2008 6 TO THE VERY SAME PARTIES AND SUCH KIND OF PAYMENTS HAS BEEN ACCEPTED BY THE AO IN OTHER YEARS. 14. WE HAVE NOTICED THAT THE ASSESSING OFFICER HAS DISALLOWED THE IMPUGNED COMMISSION PAYMENT ONLY ON THE GROUND THAT THE ASSESSEE HAS FAILED TO FURNISH EVIDENCES OF TYPES OF SERVICES RE NDERED BY THE RECIPIENTS OF COMMISSION PAYMENT. THERE SHOULD NOT BE ANY DISP UTE THAT THE COMMISSION IS GENERALLY PAID FOR PROCUREMENT OF SAL ES. THE ASSESSEE HAS FURNISHED EVIDENCES RELATING TO COMMISSION PAYMENTS IN PAPER BOOK AT PAGES 164 TO 253. THE DEBIT NOTE RAISED BY THE ASS ESSEE GIVES REFERENCE TO THE SALES MADE. AS SUBMITTED BY LD A.R, ABOUT 8 0% OF THE COMMISSION PAYMENTS WERE SEEN MADE TO M/S ACON LTD. THE ACKNO WLEDGEMENT LETTER GIVEN BY M/S ACON LTD TO ONE OF THE PAYMENTS IS PLA CED AT PAGE 171 OF THE PAPER BOOK. THE DEBIT NOTES ISSUED BY ANOTHER AGEN T NAMED BARINDERJIT SINGH SAHNI ARE ALSO PLACED IN THE PAPER BOOK, WHIC H ALSO CONSTITUTES THIRD PARTY EVIDENCES. THE DEBIT NOTE ISSUED BY BAYEGAN LTD IS ALSO PLACED IN PAGE 187 OF THE PAPER BOOK. THUS IT IS SEEN THAT T HE ASSESSEE HAS FURNISHED EVIDENCES OBTAINED FROM AT LEAST THREE OF THE FOREIGN AGENTS AND THE PAYMENTS MADE TO THEM ACCOUNT FOR ABOUT 85% OF THE AGGREGATE COMMISSION PAYMENTS. ALL THESE DOCUMENTS PROVE THA T THE FOREIGN AGENTS HAVE WORKED ON BEHALF OF THE ASSESSEE IN PROCURING SALES. THE LD A.R ALSO SUBMITTED THAT THE ASSESSEE HAD MADE SIMILAR COMMIS SION PAYMENTS TO MOST OF THE AGENTS IN OTHER YEARS AND THE SAME HAS BEEN ACCEPTED BY THE AO. UNDER THESE SET OF FACTS, WE ARE OF THE VIEW T HAT THE AO HAS MADE THE IMPUGNED ADDITION ONLY ON SURMISES AND SUSPICIO N. ACCORDINGLY, WE AFFIRM THE ORDER OF LD CIT(A) ON THIS ISSUE. 15. THE NEXT ISSUE CONTESTED BY THE REVENUE REL ATES TO THE RATE OF DEPRECIATION ADMISSIBLE ON COMPUTER SOFTWARE EXPEND ITURE. THE ASSESSEE ITA 3747/MUM/2008 CO NO.187/M/2008 7 CLAIMED DEPRECIATION @ 60%. HOWEVER, THE AO ALLOWE D DEPRECIATION @ 25% TREATING THE SAME AS INTANGIBLE ASSETS. THE LD CIT(A) NOTICED THAT THE INCOME TAX RULES PRESCRIBES THE RATE OF DEPRECI ATION ADMISSIBLE ON COMPUTER INCLUDING COMPUTER SOFTWARE AS 60%. ACC ORDINGLY, THE LD CIT(A) ALLOWED THE CLAIM OF THE ASSESSEE. SINCE TH E INCOME TAX RULES ITSELF PRESCRIBED THE RATE OF DEPRECIATION @ 60% ON COMPUTER SOFTWARE, WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF LD CIT(A) ON THIS ISSUE. 16. THE LAST ISSUE CONTESTED BY THE REVENUE REL ATES TO THE SHORT TERM CAPITAL LOSS CLAIMED BY THE ASSESSEE ON SALE OF OPT IONALLY CONVERTIBLE FULLY REDEEMABLE NON-CUMULATIVE PREFERENCE SHARES. THE FACTS RELATING TO THE SAME ARE DISCUSSED IN BRIEF. THE ASSESSEES GROUP COMPANY NAMED M/S MAFATLAL INDUSTRIES LTD (MIL) HAD BECOME A SICK COM PANY AND HENCE REFERRED TO BIFR. AS PER THE SCHEME APPROVED BY BI FR, THE CHEMICAL DIVISION OF MIL WAS REQUIRED TO BE DEMERGED AS A SE PARATE COMPANY, SINCE THE CHEMICAL DIVISION WAS MAKING PROFITS. ACCORDIN GLY, THE CHEMICAL DIVISION OF MIL WAS DEMERGED AND THE ASSESSEE COMPA NY WAS FORMED TO CARRY ON THE CHEMICAL BUSINESS ALONG WITH ALL ASSET S AND LIABILITIES AS A GOING CONCERN. ACCORDING TO BIFR SCHEME, THE ASSES SEE COMPANY WAS REQUIRED TO CONTRIBUTE RS.90.00 CRORES TO MIL. ACC ORDINGLY THE ASSESSEE COMPANY CONTRIBUTED THE ABOVE SAID AMOUNT AND RECEI VED NINE CRORES OF OPTIONALLY CONVERTIBLE FULLY REDEEMABLE NON-CUMULA TIVE PREFERENCE SHARES (OCFRNP) OF RS.10/- PER EACH. THE ASSESSEE COMPANY APPROVED THE TERMS AND CONDITIONS OF RECEIVING OCFRNP IN ITS BOARD MEETING HELD ON 28-01-2004. SUBSEQUENTLY THE BOARD OF DIRECTORS OF MIL APPROVED ISSUING OF OCFRNP IN ITS BOARD MEETING HELD ON 02-11.2004 A ND THE ASSESSEE COMPANY WAS ISSUED THE PREFERENCE SHARES. ITA 3747/MUM/2008 CO NO.187/M/2008 8 17. THEREAFTER, THE ASSESSEE COMPANY PROPOSED T O SELL 3 CRORES SHARES OF OCFRNP AND IN THAT REGARD, A BOARD RESOLUTION WA S PASSED ON 03.12.2004. ACCORDINGLY THE ASSESSEE SEARCHED FOR BUYERS AND ALSO OBTAINED A VALUATION REPORT FROM AN INDEPENDENT VAL UER TO ASCERTAIN THE MARKETABLE RATE OF OCFRNP. THE INDEPENDENT VALUER NAMED M/S S.B. CHOWKSHI & COMPANY GAVE ITS REPORT ON 09-02-2005 WH ERE IN, IT OBSERVED THAT THE MARKETABLE RATE IS NIL, SINCE MIL WAS MAKI NG CONTINUOUS LOSSES. 18. THE ASSESSEE SUBSEQUENTLY SOLD 3 CRORES OCF RNP OF RS.10/- EACH HAVING AGGREGATE FACE VALUE OF RS.30.00 CRORES ON 2 5-02-2015 TO A COMPANY NAMED M/S KANJI PITAMBER FOREX P LTD FOR AN AGGREGATE AMOUNT OF RS.30.00 LAKHS, I.E., AT THE RATE OF RE.0.10 PER SHARE. ACCORDINGLY, THE ASSESSEE MADE A SHORT TERM CAPITAL LOSS OF RS.29.70 CRORES AND THE SAME WAS ADJUSTED AGAINST THE CAPITAL GAIN REALIZED BY T HE ASSESSEE ON SALE OF LAND AND FLAT. THE ASSESSEE HAD MADE LONG TERM CAP ITAL GAIN OF RS.15.02 CRORES ON SALE OF LAND AND FLAT AND THE SHORT TERM CAPITAL LOSS REALIZED ON SALE OF OCFRNP WAS ADJUSTED TO THE EXTENT OF RS.15. 02 CRORES. 19. THE AO, HOWEVER, HELD THAT THE SALE OF OCF RNP WAS MERE A PAPER TRANSACTION AIMED ONLY TO GENERATE SHORT TERM CAPIT AL LOSS AND ACCORDINGLY DISALLOWED THE SAME. THE LD CIT(A), HOWEVER, ALLOW ED THE SAME AND HENCE THE REVENUE IS CONTESTING THE DECISIONS OF LD CIT(A) ON THIS ISSUE. 20. THE LD D.R STRONGLY SUPPORTED THE ORDER OF TH E ASSESSING OFFICER. HE SUBMITTED THAT THE VALUATION REPORT OB TAINED BY THE ASSESSEE WAS A SELF SERVING ONE AND HENCE NO CREDEN CE SHOULD BE GIVEN TO IT. HE SUBMITTED THAT THE ASSESSEE COMPAN Y DID OBTAIN VALUATION REPORT AT THE TIME OF PURCHASE OF OCFRNP. HE SUBMITTED THAT THE ASSESSEE WAS HAVING AN OPTION TO CONVERT T HE OCFRNP ITA 3747/MUM/2008 CO NO.187/M/2008 9 INTO EQUITY SHARES OF MIL AND THE AVERAGE MARKET RA TE OF MIL PREVAILING AT THAT POINT OF TIME WAS RS.25/- PER SH ARE. ACCORDINGLY HE SUBMITTED THAT THE ASSESSEE COMPANY COULD HAVE MADE GOOD PROFIT BY OPTING FOR CONVERSION OF OCFRNP INTO EQUITY SHARES OF MIL AND THEN SELLING THE SAME IN THE OPEN MARKET. HE SUBMITTED THAT THE ASSESSEE COMPANY HAS GENERATED A RTIFICIAL SHORT TERM CAPITAL LOSS WITH THE INTENTION OF SETTI NG OFF THE SAME AGAINST THE LONG TERM CAPITAL GAIN REALISED ON SALE OF LAND AND FLAT. HE SUBMITTED THAT THE BUYER OF OCFRNP HAS AL LOWED THE ASSESSEE COMPANY TO PLEDGE THE SHARES WITH UTI BANK AGAINST THE LOAN AVAILED BY IT. HE SUBMITTED THAT THE BUYERS W OULD NOT NORMALLY ALLOW PLEDGING OF SHARES AND HENCE THE ALL EGED SALE TRANSACTION BECOMES QUESTIONABLE. HE FURTHER SUBMI TTED THAT THE BUYER OF OCFRNP, VIZ., M/S KANJI PITAMBER FOREX P LT D HAD OBTAINED LOAN OF RS.30.00 LAKHS FROM ANOTHER COMPAN Y NAMED M/S MONOCHROME INVESTMENTS P LTD, WHICH IN TURN HAD OBTAINED LOAN FROM M/S SOUSHREYAS INVESTMENTS INDIA LTD. TH E REGISTERED OFFICE OF M/S SOUSHREYAS INVESTMENTS INDIA LTD WAS HAPPENED TO BE THE ADDRESS OF THE STATUTORY AUDITOR OF THE ASSE SSEE COMPANY. ACCORDINGLY, THE LD D.R SUBMITTED THAT THE LINK BET WEEN THE BUYER AND THE ASSESSEE COMPANY THROUGH THE STATUTORY AUDI TOR FURTHER STRENGTHENS THE CASE OF THE REVENUE. HE FURTHER SU BMITTED THAT THE BIFR HAS MERELY SAID THAT THE ASSESSEE COMPANY SHOULD INFUSE RS.90.00 CRORES INTO MIL AND THE MODALITIES HAVE NOT BEEN PRESCRIBED BY BIFR. 21. THE LD A.R SUBMITTED THAT THE ASSESSEE WAS CONSTRAINED TO PURCHASE 9 CRORES OCFRNP FROM MIL AS PER THE SCHEME APPROVED BY BIFR AND HENCE THE ASSESSEE HAD NO OPTION TO REF USE THE ITA 3747/MUM/2008 CO NO.187/M/2008 10 SAME. HE FURTHER SUBMITTED THAT THE HAS DECIDED TO SELL 3 CRORES SHARES BY PASSING RESOLUTION IN THE BOARD MEETING A ND THE SAME WAS SOLD TO AN INDEPENDENT PARTY AND TO ANY RELATED CONCERN. HE SUBMITTED THAT THE ASSESSEE COMPANY HAS OBTAINED VA LUATION REPORT FROM AN INDEPENDENT VALUER, WHO HAD ASSIGNED NIL VALUE FOR OCFRNP AND HENCE THE ASSESSEE COMPANY WAS CONST RAINED TO SELL THE SHARES TO A WILLING BUYER AT THE PRICE AGR EED BETWEEN THE BUYER AND THE ASSESSEE COMPANY. ACCORDINGLY HE SUB MITTED THAT THE SALE TRANSACTION WAS AN UNCONTROLLED TRANSACTIO N WITH AN OUTSIDER AND HENCE THE AO WAS NOT JUSTIFIED IN IMPU TING MOTIVE ON THE IMPUGNED TRANSACTION. HE SUBMITTED THAT THE ASSESSEE HAD AN OPTION TO CONVERT OCFRNP INTO EQUITY SHARES OF MIL AND IT IS DONE SO, THEN THE MIL WOULD BECOME SUBSIDIARY OF THE ASSESSEE COMPANY. SINCE MIL WAS A LOSS MAKING COMP ANY AND SINCE THE ASSESSEE COMPANY WAS DEMERGED UNDER BIFR SCHEME, OPTING FOR CONVERSION WOULD HAVE DEFEATED THE VERY PURPOSE OF BIFR SCHEME. FURTHER CONVERSION OF SUCH HUGE NUMBE R OF SHARES WOULD ALSO CRASH THE PREVAILING MARKET PRICE OF MIL SHARES. FURTHER, THE ELIGIBILITY OF THE ASSESSEE TO OBTAIN LOANS FROM FINANCIAL INSTITUTIONS WOULD ALSO BE AFFECTED BADLY IF THE MIL BECOMES ITS SUBSIDIARY. ACCORDINGLY HE SUBMITTED T HAT THE ASSESSEE COMPANY HAS TAKEN A BUSINESS DECISION TO S ELL THE 3 CRORE OCFRNP TO AN OUTSIDER. 22. THE LD A.R SUBMITTED THAT THE SHARE HOLDERS OF MIL WERE GIVEN COMPENSATION ON DEMERGER OF ITS CHEMICAL DIVI SION INTO THE ASSESSEE COMPANY. THEREAFTER THE ASSESSEE COMPANY WAS REQUIRED TO INFUSE RS.90 CRORES INTO MIL AS PER THE SCHEME FRAMED BY BIFR. SINCE THE OCFRNP WAS PURCHASED AS PER ITA 3747/MUM/2008 CO NO.187/M/2008 11 SCHEME OF BIFR, THERE WAS NO NECESSITY TO OBTAIN VA LUATION REPORT AT THE TIME OF PURCHASE. HE SUBMITTED THAT THE OPTI ON TO CONVERT OCFRNP INTO EQUITY SHARES WAS AVAILABLE TO MIL AFTE R TEN YEARS. HOWEVER, THE ASSESSEE COMPANY COULD OPT FOR CONVERS ION AFTER GIVING THREE MONTHS NOTICE. THE RATE OF DIVIDEND O F OCFRNP WAS JUST 1% ONLY. HOWEVER, FOR THE REASONS STATED EARL IER, THE ASSESSEE COMPANY COULD NOT OPT FOR CONVERSION. HE SUBMITTED THAT EVEN THOUGH THE SHARES OF MIL WAS TRADED AT RS .22/- TO RS.25/-, THE VOLUME OF TRADE WAS VERY LOW AND HENCE THE SAID FACT WAS ALSO TAKEN INTO CONSIDERATION BY THE ASSES SEE COMPANY. ACCORDINGLY HE SUBMITTED THAT THE ASSESSEE COMPANY HAS TAKEN A COMMERCIAL DECISION TO SELL 3 CRORES OCFRNP AT RE.0 .10 PER SHARE AND IT WAS SOLD TO A WILLING BUYER. 23. THE LD. A.R FURTHER SUBMITTED THAT THE BUYER IS NOT RELATED TO THE ASSESSEE COMPANY AND THIS FACT HAS BEEN FOUN D TO BE TRUE BY THE ASSESSING OFFICER DURING THE COURSE OF ENQUI RIES CONDUCTED WITH REGARD TO THE BUYERS COMPANY. THE FACT THAT THE ADDRESS OF THE ONE OF THE FINANCING COMPANIES WAS FOUND TO BE THE ADDRESS OF THE AUDITOR OF THE ASSESSEE COMPANY WOULD NOT BE A RELEVANT FACTOR IN ESTABLISHING LINK BETWEEN THE BUYER AND T HE ASSESSEE COMPANY, SINCE IT IS NOT SHOWN THAT THE FUNDS FOR P URCHASE OF SHARES HAS FLOWN FROM THE ASSESSEE COMPANY. ACCORD INGLY HE SUBMITTED THAT THE ASSESSING OFFICERS CONCLUSION T HAT THE TRANSACTION OF SALE WAS A PAPER TRANSACTION IS NOT BASED ON ANY MATERIAL, BUT ON SURMISES AND SUSPICION. HE FURTHE R SUBMITTED THAT THE FACT THAT THE BUYER HAS ALLOWED TO PLEDGE THE SHARES WAS AN UNDERSTANDING BETWEEN THE ASSESSEE COMPANY AND T HE BUYER. ITA 3747/MUM/2008 CO NO.187/M/2008 12 24. THE LD A.R FURTHER SUBMITTED THAT THE ASSESSE E HAS SET OFF THE SHORT TERM CAPITAL LOSS ARISING ON SALE OF OCFR NP AGAINST THE LONG TERM CAPITAL GAIN ARISING ON SALE OF LAND AND FLAT. HE SUBMITTED THAT THE ASSESSEE IS ENTITLED TO ARRANGE HIS AFFAIRS AS NOT TO ATTRACT TAXES AND THE SAME HAS BEEN APPROVED BY THE HONBLE SUPREME COURT IN THE CASE OF UNION OF INDIA VS. AZADI BACHAO ANDOLAN (2003)(132 TAXMAN 373). IN THE INST ANT CASE, THE TRANSACTION HAS NOT BEEN FOUND TO BE GENUINE AN D HENCE THE DECISION RENDERED BY HONBLE SUPREME COURT IN THE C ASE OF MCDOWELL AND CO.(154 ITR 148) IS NOT APPLICABLE. TH E LD A.R PLACED RELIANCE ON HOST OF CASE LAWS REPORTED IN 17 3 ITR 479, 222 ITR 831, 31 ITR 28, 66 ITR 622, 231 ITR 108, 124 TA XMANN 578. 25. THE LD A.R FURTHER SUBMITTED THAT THE IMPUG NED TRANSACTION MAY BE VIEWED FROM THE ANGLE OF BUYERS ALSO. HE SUBMITTED THAT THE BUYER COULD REDEEM THE PREFERENC E SHARES AFTER EXPIRY OF 20 YEARS AND COULD GET RS.30.00 CRO RES AT THAT POINT OF TIME. HE SUBMITTED THAT THE PRESENT VALUE OF RS.30.00 CRORES, IF DISCOUNTED @ 24% P.A. WOULD COME TO APPR OXIMATELY RS.30.00 LAKHS, I.E., THE VALUE OF THE IMPUGNED TRA NSACTION. SINCE THE PREFERENCE SHARES CARRIED DIVIDEND RATE OF 1% A ND SINCE THE POSSIBILITY OF REALISING DIVIDEND IS ALSO REMOTE, T HE BUYER WOULD ONLY ASCERTAIN THE PRESENT VALUE OF THE INVESTMENTS . ACCORDINGLY THE BUYER HAS OFFERED RS.30.00 LAKHS TO THE ASSESSE E. ACCORDINGLY THE LD A.R SUBMITTED THAT THE IMPUGNED TRANSACTION WAS A COMMERCIAL TRANSACTION BETWEEN A WILLING SELL ER AND WILLING BUYER AND HENCE THE LD CIT(A) WAS JUSTIFIED IN DELE TING THE ADDITION. ITA 3747/MUM/2008 CO NO.187/M/2008 13 26. IN THE REJOINDER, THE LD D.R SUBMITTED THAT THE COMMERCIAL EXPEDIENCY IN SELLING THREE CRORE SHARES WAS NOT ES TABLISHED BY THE ASSESSEE. HE FURTHER SUBMITTED THAT A BUYER WO ULD ALLOW PLEDGING OF SHARES ONLY IF IT IS A RELATED CONCERN. 27. WE HAVE HEARD RIVAL SUBMISSIONS ON THIS ISS UE AND PERUSED THE RECORD. IN OUR VIEW, THE TRANSACTION APPEARS T O BE UNBELIEVABLE AT THE FIRST GLANCE, SINCE THE PREFERE NCE SHARES HAVING A VALUE OF RS.30.00 CRORES HAVE BEEN SOLD FO R RS.30.00 LAKHS. IT MAY APPEAR THAT A PRUDENT BUSINESS MAN W OULD NOT ENTER INTO SUCH A KIND OF TRANSACTION. WE MAY AGRE E WITH THE SAID PROPOSITION, PROVIDED THE ASSESSEE COMPANY HAS PURCHASED THE OCFRNP AT ITS OWN WILL WITHOUT ANY COMPULSION. IN THAT CASE, IT MAY BE POSSIBLE TO SAY THAT A PRUDENT BUSINESSMA N, AFTER HAVING INVESTED RS.30.00 CRORES, WOULD NOT DARE TO SELL THE SAME AFTER FEW MONTHS FOR RS.30.00 LAKHS. IN THE INSTAN T CASE, THE PECULIAR FEATURES ARE THAT THE ASSESSEE WAS CONSTRA INED TO INVEST RS.90.00 CRORES IN ACCORDANCE WITH THE SCHEME FRAME D BY BIFR FOR REVIVING MIL. THEREAFTER, THE ASSESSEE HAS TAK EN A DECISION TO SELL PART OF THE OCFRNP. IT HAS OBTAINED A VALUATI ON REPORT FROM AN INDEPENDENT VALUER, WHO HAS GIVEN A NIL VALUE FO R OCFRNP FOR THE REASONS GIVEN IN THE REPORT. IT IS A FACT THAT THE MIL WAS A SICK COMPANY AND HENCE IT WAS REFERRED TO BIFR. TH E PROFIT MAKING DIVISION OF MIL WAS DEMERGED INTO THE ASSESS EE COMPANY. HENCE THE VALUATION OF OCFRNP ISSUED BY MIL WOULD B E VALUED BY CONSIDERING THE FINANCIALS OF MIL. APPARENTLY, ON THE DATE OF VALUATION, THE FINANCIALS OF MIL WERE IN BAD SHAPE AND HENCE FOR PROPER REASONS, THE VALUER HAS ASSIGNED NIL VALUE F OR OCFRNP. HENCE, WE ARE OF THE VIEW THAT THE REPORT GIVEN BY THE ITA 3747/MUM/2008 CO NO.187/M/2008 14 INDEPENDENT VALUER CANNOT BE BRUSHED ASIDE SIMPLY F OR THE REASON THAT THE ASSESSEE HAS INCURRED LOSS ON SALE OF OCFRNP. FURTHER, THE FACT THAT THE BUYER HAS ALLOWED THE PL EDGE OF SHARES AGAINST THE LOAN TAKEN BY THE ASSESSEE COMPANY, IN OUR VIEW, WOULD NOT CONVERT THE GENUINE TRANSACTION INTO A SH AM TRANSACTION, UNLESS IT IS ESTABLISHED THAT THE TRAN SACTION OF SALE ITSELF WAS SHAM. IN THE INSTANT CASE, WE ARE OF TH E VIEW THAT THE AO HAS ENTERTAINED SUCH A BELIEF ONLY ON SURMISES A ND SUSPICION WITHOUT BRINGING ON RECORD ANY CREDIBLE EVIDENCE. WE ARE ALSO IMPRESSED BY THE CONTENTION OF THE LD A.R THAT WAS PRESSED FROM THE POINT OF VIEW OF THE BUYER OF THE OCFRNP. SINC E MIL WAS A SICK COMPANY, IN THE NORMAL COURSE, THE OCFRNP ISSU ED BY IT WOULD NOT HAVE ANY DEMAND. IN THAT CASE, THE BUYER WOULD DEFINITELY THE PRESENT VALUE OF THE OCFRNP BY FURTH ER TAKING RISK OF POSSIBILITY OF LOSS OF ENTIRE CAPITAL, SINCE MIL WAS A SICK COMPANY. THE BUYERS VIEW POINT, IN OUR VIEW, WOUL D DEFINITELY SUPPORT THE SALE VALUE OF RS.30.00 LAKHS. FURTHER THE AO HAS ALSO FAILED TO SHOW THAT THE IMPUGNED SALE TRANSACTION W AS ENTERED WITH A RELATED CONCERN AND HE HAS ALSO COULD NOT PR OVE THAT THE FUNDS HAVE EMANATED FROM THE ASSESSEE OR ITS RELATE D CONCERN. 28. WE HAVE GONE THROUGH THE ORDER OF LD CIT(A) AND WE AGREE WITH THE REASONING GIVEN BY THE FIRST APPELLA TE AUTHORITY FOR DELETING THIS ADDITION. FOR THE SAKE OF CONVENIENC E, WE EXTRACT BELOW THE OPERATIVE PORTION OF HIS ORDER:- 8.6 I HAVE DULY CONSIDERED ALL THE ASPECTS OF THE ISSUE INVOLVED IN THIS GROUND OF APPEAL. THOUGH THE AO HA S CLAIMED CONTRADICTIONS IN THE FACTS PRESENTED BY TH E ASSESSEE RELATING TO ALLOTMENT, ISSUE AND SALE OF P REFERENCE SHARES BUT CONSIDERING THE EVENTS EXPLAINED BY THE ASSESSEE ITA 3747/MUM/2008 CO NO.187/M/2008 15 I DO NOT FIND ANY SUCH CONTRADICTION. THE PURCHASE OF PREFERENCE SHARES WAS PART OF COMMITMENT AS PER SCH EME OF BIFR AND SALE OF THE PREFERENCE SHARES IS A COMM ERCIAL DECISION. THE SALE OF PREFERENCE SHARES IS AUTHORIS ED BY BOARD RESOLUTION DATED 3-12-2004. COMING TO PRICE AT WHICH THESE PREFERENCE SHARES WERE SOLD IT IS SEEN THAT THE BOARD HAS AUTHORISED TO SELL THESE SHARES AT A PRIC E DETERMINED A VALUER. THE VALUER AS DISCUSSED FOUR D IFFERENT METHODS WHICH ARE NORMALLY EMPLOYED FOR VALUATION O F PREFERENCE SHARES. HOWEVER, THE VALUER HAS NOT FIXE D ANY VALUE TO THE PREFERENCE SHARE BUT EXPRESSED HIS OPI NION THAT THESE SHARES COULD FETCH ANY VALUE BETWEEN A WILLIN G SELLER AND A WILLING BUYER. IN MY OPINION THE VALUER BEING EXPERT IN HIS FIELD AND EXPRESS HIS OPINION ON THE BASIS O F CERTAIN INFORMATION AND MATERIALS AND THEREFORE CANNOT BE QUESTIONED WITHOUT PROVING THE SAME TO BE UNTRUE. T HE PRICE OF EQUITY SHARES OF MIL HAS NOTHING TO DO, WI TH THE SALE PRICE OF PREFERENCE SHARES WHICH ARE NOT QUOTE D. IT IS BROUGHT TO MY NOTICE BY THE LD. AR THAT THE VOLUME OF THE SHARES OF MIL IN THE SHARE MARKET WAS VERY LOW AND NOMINAL AND IF HUGE QUANTITY OF SHARES OF MIL ARE OFFERED F OR SALE THE PRICE COULD FALL TO ANY LOW LEVEL. IT IS ALSO B ROUGHT TO MY NOTICE BY THE ID. AR THAT ON CONVERSION OF PREFEREN CE SHARES INTO EQUITY SHARES IN FUTURE THE ASSESSEE COMPANY W OULD BECOME HOLDING COMPANY OF MIL WHICH IS UNDER BIFR A ND TO AVOID THE SAME IT WAS THOUGHT FIT BY THE ASSESSEE T O SALE PART OF THE PREFERENCE SHARES ON AVAILABILITY OF A WILLING BUYER. IN MY OPINION THE SALE PRICE OF PREFERENCE S HARES IS UPTO MUTUAL CONSENT OF THE WILLING SELLER AND WILLI NG BUYER. THE LD. AR EXPLAINED THAT IN ALL SENSE THERE WAS NO HOPE OF ANY RETURN ON THESE PREFERENCE SHARES WHICH WERE PA RT OF NON-PERFORMING ASSETS. IN THE CASE OF K.P. VARGHESE V. ITO 131 ITR 597 THE SUPREME COURT HELD THAT WHAT IN FACT NEVER ACCRUED OR WAS NEVER RECEIVED CANNOT BE COMPUTED AS CAPITAL GAINS. AS REGARDS SOURCE OF INVESTMENT BY KANJI PITAMBER FORE X PVT.LTD. I DO NOT FIND ANY INCONSISTENCY AND SHAMNE SS MORE PARTICULARLY WHEN ALL THE TRANSACTIONS ARE CARRIED OUT THROUGH BANKING CHANNEL.THE AO COULD NOT BRING ON RECORD AN Y POSITIVE MATERIAL TO PROVE ANY ACCOMMODATION ENTRY IN THESE TRANSACTIONS. THE PLEDGE OF SHARES WITH THE BANK AS COLLATERAL SECURITIES IS IN ORDER AND KANJI WAS AL SO A PARTY TO ITA 3747/MUM/2008 CO NO.187/M/2008 16 PLEDGE AGREEMENT. THE SALE PRICE OF RS.0.10 PER SHA RE MUCH LOWER THAN PURCHASE PRICE OF RS.10/- PER SHARE ALON E CANNOT BE A CRITERIA FOR BRANDING ANY TRANSACTION IN THE N ATURE OF ACCOMMODATION ENTRY. THERE IS NOTHING IN THESE RAN SACTIONS TO TERM THE SAME AS SHAM AND MALAFIDE. IT IS ONLY G UESS WORK AND SUSPICION OF THE AO WITHOUT ANY BASIS AND REASON FOR THE SAME. THE TRANSACTION ENTERED UPON BY THE ASSESSEE WAS LEGALLY PERMISSIBLE TRANSACTION AND THE SAME CO ULD NOT DOUBTED ON IRRELEVANT AND IMMATERIAL CONSIDERATION AND FACTORS. NO CONCRETE MATERIALS HAVE BEEN BROUGHT ON RECORD BY THE AO TO ESTABLISH SUCH THE TRANSACTION TO BE N OT GENUINE. WHILE SECTION 45 PROVIDES FOR CHARGE OF TAX ON CAPI TAL GAINS, SECTION 48 PROVIDES FOR THE MODE OF COMPUTIN G INCOME UNDER THE HEAD 'CAPITAL GAINS'.THE MODE OF COMPUTATION, SHORN OF ALL TECHNICALITIES AND OTHER COMPLEXITIES IS TO DEDUCT FROM THE FULL VALUE OF TH E CONSIDERATION RECEIVED OR ACCRUING AS A RESULT OF T HE TRANSFER OF THE CAPITAL ASSET, THE COST OF ACQUISITION OF TH E ASSET BUT THIS DOES NOT ENVISAGE THAT IN ALL CASES SUCH COMPU TATION MUST RESULT IN SURPLUS OR GAINS - CIT V IS. JAYKRIS HNA HARIVALLABHDAS 231 ITR 108 (GUJ.). IT MEANS THERE C OULD BE LOSS ALSO. THE FIRST STEP TO BE TAKEN IN ORDER TO C OMPUTE THE CAPITAL GAINS IN ANY PARTICULAR CASE IS TO DETERMIN E THE 'FULL VALUE OF THE CONSIDERATION' RECEIVED OR ACCRUING AS . A RESULT OF THE TRANSFER OF THE CAPITAL ASSET. THE EXPRESSIO N 'FULL VALUE OF THE CONSIDERATION' CANNOT BE CONSTRUED AS THE MA RKET VALUE BUT AS THE PRICE BARGAINED FOR BY THE PARTIES TO THE SALE. CONSEQUENTLY, THE WORDS 'FULL PRICE' MEAN 'TH E WHOLE PRICE'. IN THE CASE OF A SALE FOR PRICE, THERE IS N O QUESTION OF ANY MARKET VALUE UNLIKE IN THE CASE OF AN EXCHANGE. THEREFORE, IN CASES OF SALES, IN ORDER TO DETERMINE THE 'FULL VALUE OF THE CONSIDERATION' ALL THAT ONE HAS TO SEE IS WHAT IS THE CONSIDERATION BARGAINED FOR - CIT V/S. GILLANDE RS ARBUTHNOT & CO. 87 ITR 407 (SC). THE WORDS 'FULL VALUE OF THE CONSIDERATION RECEIVED' IN SECTION 48 MEANS ONL Y THE ACTUAL CONSIDERATION RECEIVED BY THE ASSESSEE AND N OT THE MARKET VALUE - CIT V IS. P.SURYANARAYAN 88 ITR 321(MAD.). THE ASSESSEE HAS WORKED OUT THE CAPITAL LOSS ON SAL E OF THE PREFERENCE SHARES ON THE BASIS OF FULL VALUE OF CON SIDERATION AND COST OF ACQUISITION AND AS SUCH THE LOSS CANNOT BE DISALLOWED ON IRRELEVANT AND IMMATERIAL CONSIDERATI ON AND ITA 3747/MUM/2008 CO NO.187/M/2008 17 FACTORS. THE FACT THAT THE ASSESSEE PURCHASED THE PREFERENCE SHARES HAS NOT BEEN DOUBTED BY THE AO AND THE SALE OF PREF ERENCE SHARES IS SUPPORTED BY DEBIT NOTE, TRANSFER FORM, CONSIDERATION RECEIVED, ENTRIES IN THE BOOKS OF ACC OUNT AND STATUTORY RETURN WITH REGISTRAR OF COMPANIES. THE A O HAS ALSO EXAMINED ON OATH SHRI ASHRA, DIRECTOR OF KANJI WHO CONFIRMED THE FACT OF PURCHASE OF SHARES. IN THE CO NTEXT OF DETERMINING WHETHER A TRANSACTION IS ABOGUS OR ILLU SORY TRANSACTION OR A DEVISE, THE AO MUST BRING CONCRETE MATERIALS ON RECORD IN SUPPORT THEREWITH. IT IS ONL Y IF AND WHEN THERE ARE SOLID MATERIALS TO HOLD TAINT OF CO LLUSION OR SHAMNESS OR UNGENUINENESS THAN THE ASSESSING OFFIC ER CAN DISREGARD THE TERMS OF DOCUMENT AND DECIDE THE MATT ER ON THE BASIS OF CONCRETE MATERIALS. THE AO COULD NOT B RING ON RECORD ANY MATERIAL TO SHOW THE IMPUGNED TRANSACTI ONS TO BE SHAM TRANSACTION EXCEPT TO EXPRESS GUESS WORK A ND SUSPICION WHICH HAVE NO ROLE TO PLAY IN ASSESSMENT PROCEEDINGS HOWSOEVER IT MAY BE GRAVE. CONSIDERING THE RELEVANT FACTS TOGETHER IT IS UNREASONABLE AND ILL OGICAL TO PRESUME THAT THE ASSESSEE WAS ENGAGED IN SHAM TRANSACTION. MERELY BECAUSE THE PREFERENCE SHARES W ERE SOLD AT PRICE BELOW THE COST OF ACQUISITION DUE TO CIRCU MSTANCES THESE TRANSACTIONS CANNOT BE CONSIDERED AS SHAM TRANSACTION. AS REGARDS DECISION OF THE SUPREME COURT IN THE CAS E OF MCDOWELL 154 ITR 148 IT IS SEEN THAT THE IMPUGNED TRANSACTIO NS OF THE SHARES ARE VALID DULY SUPPORTED BY ADMISSIBLE EVIDENCES AN D THE SAME CANNOT BE IGNORED MERELY BECAUSE SUCH TRANSACTIONS HAVE RESULTED SHORT TERM CAPITAL LOSS AND ENTITLES THE A SSESSEE TO CLAIM SET OFF OF SUCH LOSS AGAINST CAPITAL GAINS WH ICH INCIDENTALLY HAS REDUCED THE TAX LIABILITY OF THE A SSESSEE. THE HON'BLE SUPREME COURT HAS RECENTLY COMMENTED ON SUC H ISSUE IN THE CASE OF UNION OF INDIA V/S. AZADI BACHA O ANDOLAN 263 ITR 706 (SC). 'WE ARE UNABLE TO AGREE WITH THE SUBMISSION THAT AN ACT WHICH IS OTHERWISE VALID IN LAW CAN BE TREATED AS NON-EST MERELY ON THE BASIS OF SOME UNDERLYING MOTIVE SUPPOSEDLY RESULTING IN SOME ECONOMIC DETRIMENT OR PREJUDICE TO THE NATIONAL INTERESTS, A S ITA 3747/MUM/2008 CO NO.187/M/2008 18 PERCEIVED BY THE RESPONDENTS.' THE SUPREME COURT IN THE DECISION IN CIT V/S . ARVIND NAROTTAM 173 ITR 479 HELD THAT THE IF THE LANGUAGE OF THE DOCUMENT IS CLEAR AND UNAMBIGUOUS THE QUESTION OF CONSIDERATION OF TAX AVOIDANCE DOES NOT ARISE. WHIL E PLANNING ADOPTED AS A DEVISE TO AVOID TAX HAS BEEN DEPRECATED, THE PRINCIPLE CANNOT BE READ AS LAYING DOWN THE LAW THAT A PERSON HAS TO ARRANGE HIS AFFAIRS S O AS TO ATTRACT MAXIMUM TAX LIABILITY, AND EVERY ACT WHICH RESULTS IN TAX REDUCTION, EXEMPTION OF TAX OR NOT ATTRACTING T AX AUTHORISED BY LAW IS TO BE TREATED AS DEVOID OF TAX . AVOIDANCE [BANYAN & BERRY V/ S. CIT, 222 ITR 831(GUJ.)]. IT IS RELEVANT TO MENTION AT THIS STAGE THAT THE PRICE PAID BY THE VENDEE TO BE TAKEN AS FULL VALUE OF CONSIDERATI ON FOR THE PURPOSE OF COMPUTING CAPITAL GAIN OR LOSS. IN S UPPORT I RELY ON THE FOLLOWING DECISIONS:- 1. SMT. P.S. VASANTHA V/S CIT 124 TAXMAN 578 (MAD) IN THIS CASE IT IS HELD THAT WHERE ASSESSEE-VENDOR SOLD SOME SHARES TO VENDEE, THE PRICE PAID BY THE VENDEE FOR SHARES SHOULD BE CONSIDERED FOR COMPUTING CAPIT AL GAINS IN HANDS OF ASSESSEE. 2. VENKATESH (MINOR) V/S CIT 243 ITR 367 (MAD) IN THIS CASE IT IS HELD THAT THE PRICE PAID FOR THE SHARES BY THE VENDEE WAS THEREFORE THE PRICE PAID FOR ACQUIRING THE SHARES AND THE ENTIRE CONSIDERATION W AS REQUIRED TO BE CONSIDERED FOR THE PURPOSE OF COMPUTING THE CAPITAL GAINS IN THE HANDS OF THE ASSESSEE. 3. MS. RUBAB M. KAZERANI V/S . CIT 91 ITD 429 (MUM) IN THIS CASE IT IS HELD THAT THE ASSESSEE WANTED TO DISPOSE OF HER IMMOVABLE PROPERTY FOR WHICH SHE ENTERED INTO A MEMORANDUM OF UNDERSTANDING (MOU) WITH A BUILDER 'SA' ON 8-6-1995 APPOINTING HIM AS T HE SOLE AND EXCLUSIVE PERSON TO IDENTIFY BUYERS AND TO COMPLETE RELEVANT FORMALITIES FOR SALE. THE ASSESSE E RECEIVED RS.5.5 CRORES FROM SA AS TOTAL SALE CONSIDERATION. THE ASSESSEE CONFERRED UPON THE SA IRREVOCABLE RIGHT TO IDENTIFY BUYERS TO PURCHASE TH E PROPERTY AND IT WAS AGREED THAT THE SA SHALL NOT CL AIM REIMBURSEMENT OF ANY EXPENSES INCURRED FOR THE PURPOSE OF DEVELOPING AND IDENTIFYING BUYERS FOR TH E PROPERTY. I WAS ALSO AGREED THAT THE ASSESSEE WOULD BE ENTITLED TO RECEIVE THE SUM OF RS.5,50,00,000 ONLY AND SHE WOULD HAVE NOTHING TO DO WITH THE PROFIT EARNED OR LOSS INCURRED BY THE SA ON IDENTIFYING BUYERS OF TH E PROPERTY AND RECEIVING THE SALE CONSIDERATION. ON 1 -7- 1998, AN AGREEMENT TO SELL WAS EXECUTED BY THE ASSESSEE. ULTIMATELY, A SALE TOOK PLACE FOR RS.11.8 7 CRORES FOR WHICH ASSESSEE WAS REFERRED TO AS A VEND ORE AND 'SA' AS THE CONFIRMING PART. THE ASSESSEE PAID CAPITAL GAIN ON RS.5.50 CRORES. THE COMMISSIONER ITA 3747/MUM/2008 CO NO.187/M/2008 19 INVOKED SECTION 263 ON THE GROUND THAT CORRECT TAX LIABILITY ON CAPITAL GAIN WAS NOT MADE. IT WAS HELD THAT WHEN ASSESSEE HAD RECEIVED ONLY RS.5.50 CRORE BY WA Y OF AGREEMENT ON 8-6-1995 WITH 'SA', SHE WAS JUSTIFI ED IN OFFERING ONLY THE SAME FOR TAX PURPOSES. IN VIEW OF THE ABOVE DISCUSSIONS I HOLD THAT THE LO SS OF RS.29,70,07,500/- INCURRED ON SALE OF PREFERENCE SHARES IS VALID AND GENUINE. I THEREFORE DIRECT THE AO TO ACCEPT THE SHORT TERM CAPITAL LOSS AS SHOWN BY THE ASSESSEE AND ALLOW THE SET OFF OF SAME AGAINST THE CAPITAL GAINS ON SALE OF OT HER PROPERTIES AND FURTHER ALLOW CARRIED FORWARD OF THE REMAINING CAPITAL LOSS TO SUBSEQUENT YEARS. THUS, THE GROUND NO.8 IS ALLOWED. 29. SINCE THE ASSESSEE HAS TAKEN A COMMERCIAL DEC ISION AND SINCE THE TRANSACTION OF SALE WAS A COMMERCIAL TRANSACTION, I N OUR VIEW, THE SAME CANNOT BE QUESTIONED SIMPLY BECAUSE THE SAID TRANSA CTION HAS RESULTED INTO HUGE LOSS. EVEN THOUGH THE AO HAS TAKEN THE VIEW T HAT THE ASSESSEE HAS ARRANGED THE TRANSACTION, WHICH ALLEGATION COULD NO T BE FINALLY PROVED WITH ANY CREDIBLE EVIDENCE, YET THE FACT REMAINS THAT TH E ASSESSEE IS NOT PRECLUDED FROM ARRANGING HIS AFFAIRS IN A MANNER TO REDUCE THE TAX BURDEN, SO LONG AS THE SAME WAS WITHIN THE LAW AND LEGITIMA TE AS HELD BY THE HONBLE SUPREME COURT IN THE CASE OF AZADI BACHAO A NDALON (SUPRA). 30. ACCORDINGLY, WE UPHOLD THE ORDER OF LD CIT( A) ON THIS ISSUE. 31. IN THE CROSS OBJECTION, THE ISSUE RELATING T O WEIGHTED DEDUCTION U/S 35(1)(II) IN RESPECT OF CONTRIBUTION OF RS.5.00 LAK HS IS ALREADY SET ASIDE TO THE FILE OF THE AO, WHILE CONSIDERING THE IDENTICAL ISSUE IN THE APPEAL OF THE REVENUE. 32. THE SECOND ISSUE URGED BY THE ASSESSEE RELAT ES TO THE DEDUCTION U/S 35(1)(IV) OF THE ACT ON THE CAPITAL EXPENDITURE OF RS.4,17,024/- RELATING TO SCIENTIFIC RESEARCH. BOTH THE PARTIES AGREED THAT THIS ISSUE MAY ALSO BE ITA 3747/MUM/2008 CO NO.187/M/2008 20 SET ASIDE TO THE FILE OF THE AO. ACCORDINGLY, WE S ET ASIDE THE ORDER OF LD CIT(A) ON THIS ISSUE AND DIRECT THE AO TO EXAMINE T HE SAME AFRESH. 33. THE LAST ISSUE CONTESTED BY THE ASSESSEE RE LATES TO THE ASSESSMENT OF ACCRUED INTEREST INCOME OF RS.56.17 LAKHS. THE ASSESSEE HAD MADE DEPOSITS WITH BANK FOR GIVING GUARANTEES IN CONNECT ION WITH THE EXECUTING PROJECT IN IRAQ. SINCE THE WAR BROKE OUT IN IRAQ, THE ASSESSEE DID NOT ACCOUNT FOR ACCRUED INTEREST ON THE ABOVE SAID DEPO SITS, SINCE THE LIABILITY RELATING TO THE SAME WAS NOT KNOWN. HOWEVER, THE A O ESTIMATED THE ACCRUED INTEREST AT RS.56.17 LAKHS AND ASSESSED THE SAME. THE LD CIT(A) ALSO CONFIRMED THE SAME. 34. BEFORE US, THE LD A.R CONTENDED THAT THE ASSES SEE WAS NOT AWARE OF THE LIABILITIES THAT WOULD ARISE AGAINST THE BANK D EPOSITS AND HENCE IT DID NOT OFFER THE INTEREST INCOME. ON THE CONTRARY, TH E LD D.R SUBMITTED THAT THE ASSESSEE IS FOLLOWING MERCANTILE SYSTEM OF ACCO UNTING AND HENCE IT IS FOUND TO OFFER THE INCOME THAT HAS ACCRUED ON DEPOS ITS. 35. HAVING HEARD RIVAL SUBMISSIONS, WE FIND MERI T IN THE SUBMISSIONS MADE BY THE LD D.R. THE FACT THAT THE INTEREST HAS ACCRUED ON THE BANK DEPOSITS AND THE FACT THAT THE ASSESSEE IS FOLLOWIN G MERCANTILE SYSTEM OF ACCOUNTING IS NOT DENIED. THE CRYSTALLIZATION OF L IABILITIES ARE ALTOGETHER DIFFERENT EVENT EVEN THOUGH THE BANK DEPOSITS MAY B E ADJUSTED AGAINST THE SAID LIABILITIES. HOWEVER, THE SAME WOULD NOT AFFECT ACCRUAL OF INTEREST ON BANK DEPOSITS. HENCE, IN OUR VIEW, THE LD CIT(A ) WAS JUSTIFIED IN CONFIRMING THE ASSESSMENT OF INTEREST ACCRUED ON BA NK DEPOSITS. ITA 3747/MUM/2008 CO NO.187/M/2008 21 36. IN THE RESULT, THE APPEAL FILED BY THE REVENUE IS TREATED AS PARTLY ALLOWED AND THE CROSS OBJECTION FILED BY THE ASSESS EE IS TREATED AS ALLOWED. BC! D EF 12 TH JUNE, 2015 C ? H@ I SD/- SD/- ( / AMIT SHUKLA ) ( . . / B.R. BASKARAN) / JUDICIAL MEMBER / ACCOUNTANT MEMBER @ MUMBAI: 12 TH JUNE,2015. . . ./ SRL , SR. PS ' #$%& '&($ / COPY OF THE ORDER FORWARDED TO : 1. '# / THE APPELLANT 2. $%'# / THE RESPONDENT. 3. ( ) / THE CIT(A)- CONCERNED 4. / CIT CONCERNED 5. JK H $L , A L , @ / DR, ITAT, MUMBAI CONCERNED 6. H M@ / GUARD FILE. / BY ORDER, N < (ASSTT. REGISTRAR) A L , @ /ITAT, MUMBAI