Gujarat Industrial Investment Corporation Ltd., Gandhinagar V. The Asstt. Commissioner of Income Tax, Gandhinagar

CO 54/AHD/2009

• Counselvise Citation: [2012] 122 COUNSELVISE.COM (IT) 7906 (ITAT-AHMEDABAD)
• Duration Of Justice: 3 year(s) 6 month(s) 17 day(s)
• Appeal Type: Cross Objection
• Pronouncement Date: 12-10-2012
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 23-08-2012
• Assessment Year: 2005-2006
• Appeal Filed On: 25-03-2009
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: B K S PANDYA
• Assessee Lawyers: S R SHAH
• Keywords: Capital asset; Depreciation; Opportunity of being heard; Earning of tax free income; Proportionate interest; Additional evidence; Revised return
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD B BENCH AHMEDABAD BEFORE SHRI G.C.GUPTA , VICE PRESIDENT AND SHRI T.R. MEENA, ACCOUNTANT MEMBER ITA NO. 624/AHD/2009 ASSESSMENT YEAR :2005-06 & C.O. NO. 54/AHD/2009 ASSESSMENT YEAR :2005-06 ASSISTANT COMMISSIONER OF INCOME TAX, GANDHINAGAR GUJARAT INDUSTRIAL INVESTMENT CORPORATION LTD. 6 TH FLOOR, BLOCK NO.11, UDHYOG BHAVAN, GANDHINAGAR V/S . V/S. GUJARAT INDUSTRIAL INVESTMENT CORPORATION LTD. 6 TH FLOOR, BLOCK NO.11, UDHYOG BHAVAN, GANDHINAGAR PAN NO. AABCG1359A ASSISTANT COMMISSIONER OF INCOME TAX, GANDHINAGAR (APPELLANT) .. (RESPONDENT) ITA NO. 2150/AHD/2009 ASSESSMENT YEAR :2006-07 GUJARAT INDUSTRIAL INVESTMENT CORPORATION LTD. 6 TH FLOOR, BLOCK NO.11, UDHYOG BHAVAN, GANDHINAGAR V/S . ASSISTANT COMMISSIONER OF INCOME TAX, GANDHINAGAR (APPELLANT) .. (RESPONDENT) ITA NO. 2213/AHD/2009 ASSESSMENT YEAR :2006-07 ASSISTANT COMMISSIONER OF INCOME TAX, GANDHINAGAR V/S . GUJARAT INDUSTRIAL INVESTMENT CORPORATION LTD. 6 TH FLOOR, BLOCK NO.11, UDHYOG BHAVAN, GANDHINAGAR (APPELLANT) .. (RESPONDENT) ITA NOS. 624, 2213 & 2150 AHD OF 09 & C.O. NO. 54 AHD OF 09 PAGE 2 BY REVENUE SHRI B.K.S. PANDYA, CIT. D.R. /BY ASSESSEE SHRI S.R. SHAH, A.R. /DATE OF HEARING 23.08.2012 /DATE OF PRONOUNCEMENT 12.10.2012 O R D E R PER : T.R.MEENA, ACCOUNTANT MEMBER OUT OF THREE APPEALS AND ONE C.O., TWO APPEALS ARE FILED BY THE REVENUE IN ITA NOS.624/AHD/2009 & 2213/AHD/2009 AND ONE BY ASSESSEE IN ITA NO. 2150/AHD/2009 ALONG WITH C.O. NO. 54/AHD/2009 FOR A .Y. 2005-06 WHICH HAVE EMANATED FROM THE ORDERS OF THE LEARNED CIT(A)-, GA NDHINAGAR DATED 31-12- 2008 FOR A.Y. 2005-06 & 24.04.2009 FOR A.Y. 2006-07 RESPECTIVELY. THE REVENUES & ASSESSEES APPEALS AND ASSESSEES C.O. WERE HEARD TOGETHER AND ARE BEING DISPOSED OF BY WAY OF THIS COMMON ORD ER FOR THE SAKE OF CONVENIENCE. ITA NO. 624/ AHD/ 2009 (A.Y. 05-06) 2. THE EFFECTIVE GROUNDS OF REVENUES APPEAL ARE A S UNDER: 1. THE LEARNED CIT(APPEALS) HAS ERRED IN LAW AND O N FACTS OF THE CASE IN DELETING THE DISALLOWANCE OF RS.23,97,98,52 0/- MADE U/S. 14A OF THE IT ACT, 1961. 2. THE LEARNED CIT(APPEALS) HAS ERRED IN LAW AND ON FA CTS OF THE CASE IN DELETING THE ADDITION OF RS.38,26,20,327/- MADE ON ACCOUNT OF LONG TERM CAPITAL GAIN. 3. THE ASSESSEE IS ENGAGED IN THE BUSINESS OF EXTEN DING FINANCIAL ASSISTANT BY WAY OF TERM LOAN, FINANCIAL SERVICES A ND IMPLEMENTATION OF JOINT ITA NOS. 624, 2213 & 2150 AHD OF 09 & C.O. NO. 54 AHD OF 09 PAGE 3 AND ASSOCIATES SECTOR PROJECT IN THE STATE OF GUJAR AT. THE LD. A.O. MADE ADDITION OF RS.23,97,98,520/- U/S.14A OF THE IT ACT . THE APPELLANT HAD MADE INVESTMENT OF RS.199.83 CRORES IN VARIOUS SHARES OF THE COMPANY QUOTED OR UNQUOTED. DURING THE YEAR ASSESSEE HAD PAID INTERE ST OF RS.60.61 CRORES ON VARIOUS LOANS TAKEN TO INVEST OR TO MAINTAIN THE IN VESTMENTS. LD. A.O. HAD GIVEN REASONABLE OPPORTUNITY OF BEING HEARD ON DISA LLOWANCE U/S.14A OF THE IT ACT AS ASSESSEE HAS DIVIDEND INCOME AND BORROWED FU ND HAD BEEN USED FOR INVESTMENT IN SHARES. THE APPELLANTS CLAIM WAS TH AT ALL THE INVESTMENTS ON WHICH IT HAD RECEIVED DIVIDEND HAD BEEN MADE BY IT BEFORE 1997 AND DEDUCTION U/S.80M WAS CLAIMED BY THE APPELLANT. TH E ASSESSING OFFICER HAD OBSERVED AS UNDER: 3. DISALLOWANCE U/S 14A: FROM THE STATEMENT OF ACCOUNTS, IT WAS OBSERVED THAT THE ASSESSEE HAS INVESTED RS 199, 83,21,000 IN VARIOUS SHARES OF THE COMPANIES, WHETHER QUOTED OR UNQUOTED. DURING THE YEAR ASSESSEE HAS PAID INTEREST OF RS 60 ,61,63,653 ON VARIOUS LOANS TAKEN TO INVEST OR TO MAINTAIN THESE INVESTMENTS. IN VIEW OF THE PROVISIONS OF SECTION 10(34) OF IT ACT, THE PROSPECTIVE DIVIDEND INCOME OF SUCH INVESTMENT WOULD BE AN EXEM PTED INCOME FOR TAXATION PURPOSE. CONSIDERING THE ABOVE FACT, I T WAS PERCEIVED THAT MAKING AN INVESTMENT IN EQUITY SHARES BEARING TAX-FREE RETURNS, PRIMA FACIE AMOUNTS TO DIVERSION OF BUSINESS FUND A S SUCH. IN OTHER WORDS, BY USING THE BUSINESS FUND OF SUCH NATURE FO R OTHER FINANCIAL ACTIVITY WHICH DOES NOT YIELD ANY TAXABLE RETURN AM OUNTS TO AN EFFORT TOWARDS REDUCTION IN TAXABLE INCOME WHILE CLAIMING INTEREST EXPENDITURE INCURRED ON FUND UTILIZED FOR SUCH INVE STMENT. THE ABOVE IS NOT A PERMISSIBLE TAXATION PLANNING IN VIEW OF T HE HISTORICAL DECISION OF THE SUPREME COURT GIVEN IN THE CASE OF MACDONALD. TO ITA NOS. 624, 2213 & 2150 AHD OF 09 & C.O. NO. 54 AHD OF 09 PAGE 4 DEAL WITH SUCH SITUATION, THE LEGISLATURE IN ITS WI SDOM HAS INCORPORATED THE SECTION 14A, WHICH READS AS UNDER: SECTION 14A: EXPENDITURE INCURRED IN RELATION TO INCOME NOT INCLUDIBLE IN TOTAL INCOME: FOR THE PURPOSES OF COMPUTING THE TOTAL INCOME UNDE R THIS CHAPTER, NO DEDUCTION SHALL BE ALLOWED IN RESP ECT OF EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THIS ACT. 3.1 CONSIDERING THE ABOVE FACT, THE ASSESSEE WAS AS KED THAT WHY THE PROPORTIONATE INTEREST EXPENDITURE CLAIMED IN T HE PROFIT & LOSS ACCOUNT TO THE EXTENT OF DIVERSION OF INTEREST BEAR ING FUNDS TO NON- TAXABLE YIELDING INVESTMENT SHOULD NOT BE DISALLOWE D U/S 14A OF THE IT ACT. THE ASSESSEE VIDE ITS LETTER DATED 13/12/07 EXPLAINED ITS POSITION. THE GIST OF THE SUBMISSION IS AS UNDER: ALL THE INVESTMENTS ON WHICH WE HAVE RECEIVED DIVID END HAVE BEEN MADE BY US BEFORE 1997. IN THOSE YEARS DEDUCTIONS W ERE CLAIMED U/S. 80M OF THE ACT. THE ASSESSING OFFICER HAD DISALLOWE D THE INTEREST EXPENSES INCURRED FOR THE EARNING THE DIVIDEND AND ALLOWED THE DEDUCTION U/S. 80M ON THE NET DIVIDEND INCOME RECEI VED. IN ALL THE ASSESSMENT YEARS LEARNED CIT(A) AND UPTO A.Y. 1996- 97 ITAT HAS DELETED THE DISALLOWANCE MADE AND ALLOWED THE DEDUC TION U/S. 80M ON THE GROSS DIVIDEND INCOME RECEIVED. RELEVANT FINDIN G OF THE COMMISSIONER OF INCOME TAX (APPEALS) IS REPRODUCED HEREUNDER FOR YOUR READY REFERENCE : IT IS SUBMITTED THAT AS SHOWN ABOVE IT IS AN ESTABL ISHED FACT THAT ALL THE INVESTMENTS MADE BEFORE 1997-98 ARE MADE FROM THE O WN FUNDS AND NO ITA NOS. 624, 2213 & 2150 AHD OF 09 & C.O. NO. 54 AHD OF 09 PAGE 5 INTEREST EXPENSES ARE INCURRED FOR THE SAME. THE SA ID FACTS ARE ACCEPTED BY THE COMMISSIONER OF INCOME TAX (APPEALS ) AND INCOME TAX TRIBUNAL ALSO AND HENCE PROVISIONS OF SECTION 1 4A IS NOT APPLICABLE TO THE INVESTMENT MADE BEFORE 1997-98. ACCORDINGLY WE SUBMIT THAT THE DISALLOWANCE AS PROPOSED BY YOU CAN NOT BE MADE UND ER SECTION 14A AS NO PART OF THE INVESTMENT WAS MADE OUT OF BORROW ED FUNDS. WE HAVE TO FURTHER STATE THAT THE WE HAVE ENOUGH FU NDS I.E. CAPITAL AND NON CASH EXPENSES DEBITED TO PROFIT AND LOSS ACCOUN T I.E. CASH AVAILABLE FOR THE INVESTMENTS IN THE TAX FREE SECURITIES AS S HOWN BELOW : SHARE CAPITAL RS. 256.9 7 CRORES DEPRECIATION RESERVE RS. 5.81 C RORES PROVISION FOR NPA RS. 110.86 CR ORES TOTAL FUNDS INVESTMENTS RS. 373.64 CRORES INVESTMENTS RS. 199.83 CR ORES WE NOW DRAW YOUR ATTENTION TO THE ORDER OF THE CIT( A) FOR A.Y. 2004-05, THE CIT(A) HAS CONSIDERED ALL THE ABOVE SUBMISSIONS MADE BY US AND HAS DELETED DISALLOWANCE MADE BY THE ASSESSING OFFI CER. WE HERE REPRODUCE THE DECISION OF THE CIT(A) AS UNDER : WE SUBMIT THAT LOOKING AT THE PURPOSE OF THE AMENDM ENT BEING TO MINIMIZE THE LITIGATION THE PROPOSAL MADE BY YOU IS AGAINST THE SPIRIT OF THE AMENDMENT. FURTHER UNLESS AND UNTIL METHOD OF C OMPUTATION IS PRESCRIBED SO SUCH DISALLOWANCE CAN BE MADE AND THI S VIEW HAS BEEN TAKEN EVEN BY VARIOUS INCOME TAX TRIBUNAL'S ALSO. A ND IN OUR CASE WHEN THE FACT THAT INVESTMENTS HAD NOT BEEN MADE OU T OF BORROWED FUNDS HAD BEEN EXAMINED AND ACCEPTED EVEN BY TRIBUN AL DISALLOWANCE AS PROPOSED BY YOU CAN NOT BE MADE UNDER SECTION 14 A OF THE ACT. THIS FACT WAS ALSO CONSIDERED BY THE CIT(A) IN A.Y. 2004-05 WHEN HE DELETED THE DISALLOWANCE MADE UNDER SECTION 14A IN THAT YEAR. WE ALSO DRAW YOUR ATTENTION TO THE DECISIONS OF THE TRIBUN AL IN THE FOLLOWING CASES : ITA NOS. 624, 2213 & 2150 AHD OF 09 & C.O. NO. 54 AHD OF 09 PAGE 6 1. ACIT V CITICORP FINANCE (INDIA) LTD. (111 TTJ 82 ) (MUM) THE PROVISIONS FOR QUANTIFICATION OF DISALLOWANCE A S CONTAINED IN SUB-SS (2) AND (3) OF S. 14A ARE PROCEDURAL AND THE REFORE APPLY TO ALL PENDING MATTERS. IT IS NO LONGER OPEN TO THE ASSESSING OFFICER TO MAKE DISALLOWANCE ACCORDING TO HIS OWN DISCRETION O R ON AD HOC BASIS, HE IS STATUTORILY REQUIRED TO COMPUTE THE DISALLOWA NCE IN THE MANNER PROVIDED BY SUB SS(2) AND (3) OF S. 14A. 2. ORIENTAL BANK OF COMMERCE VS DCIT (DELHI) IT IS TO BE NOTED THAT SECTION 14A HAS BEEN AMENDED BY THE FINANCE ACT, 2006 W.E.F. 01-04-2007. AS PER THE AMENDED 14 A, WHEREBY SUB- SECTION 2 AND 3 ARE INSERTED THEREIN AUTHORISES THE ASSESSING OFFICER TO DETERMINE THE AMOUNT INCURRED IN RELATION TO SUCH I NCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME IN ACCORDANCE WIT H SUCH METHOD AS MAY BE PRESCRIBED IF THE ASSESSING OFFICER WAS NOT SATISFIED WITH (HE CORRECTNESS OF THE CLAIM IN RESPECT OF EXPENDITURE IN RELATION TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME. THUS , PRIOR TO INSERTION OF SUB-SECTION 2 AND 3 TO SECTION 14A, THE ASSESSING O FFICER HAS NO POWER TO ARTIFICIALLY ALLOCATE CERTAIN EXPENDITURE AS HAV ING BEEN INCURRED IN RELATION TO EARNING THE INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME. IN ABSENCE OF ANY FINDING THAT SOME EXPENDI TURE WERE DEFINITELY INCURRED IN RELATION TO EARNING DIVIDEND INCOME NO ARTIFICIAL ALLOCATION CAN BE MADE SO AS TO DISALLOW THE SAME. IN VIEW OF THE ABOVE FACTUAL AND LEGAL POSITION WE SUBMIT THAT NO DISALLOWANCE AS PROPOSED BY YOU NEED BE MADE WHILE COMPLETING THE ASSESSMENT. 3.2 THE ASSESSEE'S SUBMISSION AND JUSTIFICATION MAD E IN RESPECT OF THE PROPOSED DISALLOWANCE U/S 14A WAS CONSIDERED IN THE LIGHT OF THE FACTS AND CIRCUMSTANCES INVOLVED AND ALSO THE LEGAL PROVISIONS OF SECTION 80M AND SECTION 14A OF IT ACT. AFTER TAKING A HOLISTIC VIEW OF ITA NOS. 624, 2213 & 2150 AHD OF 09 & C.O. NO. 54 AHD OF 09 PAGE 7 THE ABOVE REFERRED ASPECTS, IT IS FOUND THAT THE AS SESSEE'S CONTENTION IS DEVOID OF LEGAL AND FACTUAL GROUNDS, THEREFORE, THE SAME IS NOT ACCEPTABLE FOR THE FOLLOWING REASONS: (I) REGARDING THE RELEVANCE OF THE CIT(A)'S DECISIO N, AS RELIED UPON BY THE ASSESSEE, IT IS FELT THAT THE SA ME IS NOT APPLICABLE IN THE INSTANT CASE FOR THE REASON T HAT THE DECISION OF CIT(A) OF DELETING THE DISALLOWANCE OF INTEREST EXPENSES VIS-A-VIS THE CLAIM MADE U/S 80M OF IT ACT WAS RELEVANT TO A.Y.1997-98 AND FOR PRIOR PE RIOD ONLY. HOWEVER, THE GENESIS OF PROPOSED ADDITION I. E. PROVISION OF SECTION 14A HAS BEEN INSERTED BY THE FINANCE ACT 2001 AT SUBSEQUENT PERIOD. IN OTHER WO RDS THE RELEVANT SECTION 14A WAS NOT IN EXISTENCE WHEN THE CIT(A) DECIDED THE ISSUE OF DISALLOWANCE OF INTERES T EXPENSES RELEVANT TO CLAIM MADE U/S 80M, THEREFORE, THE APPLICABILITY OF PROVISION OF SECTION 14A WAS N EVER CONSIDERED AT ANY STAGE BEFORE. ACCORDINGLY ANY DECISION TAKEN BY AN APPELLATE AUTHORITY UNDER SUCH CIRCUMSTANCES HAS NO BEARING OR RELEVANCE TO THE IS SUE UNDER CONSIDERATION AT THIS STAGE. (II) AS FAR AS THE ASSESSEE'S ARGUMENT I.E. UTILIZA TION OF ITS OWN INTEREST-FREE FUNDS TO MAKE THE IMPUGNED INVESTMENT IS CONCERNED, THIS STATEMENT ITSELF MAY RAISE A VITAL AND INTERESTING ISSUE THAT HOW THE ASSESSEE WOULD BE ABLE TO DIFFERENTIATE IN BETWEEN ITS OWN F UND AND THE BORROWED FUND FROM THE TOTAL FUND AVAILABLE TO THEM AT ANY POINT OF TIME. IT ALSO LEADS TO AN INTE RESTING ISSUE I.E. THAT SINCE THE ASSESSEE WAS PAYING HUGE AMOUNT OF INTEREST, THEN WHY AND HOW IT OPTED TO IN VEST A PART OF BUSINESS FUND IN A PARTICULAR MANNER, WHE REIN ITA NOS. 624, 2213 & 2150 AHD OF 09 & C.O. NO. 54 AHD OF 09 PAGE 8 THE RETURN OF INVESTMENT WAS LESSER THAN THE INTERE ST EXPENDITURE ON THE BORROWED FUND. (III) REGARDING ESTABLISHING THE 'CONCEPT OF NEXUS' IN BETWEEN THE AMOUNT BORROWED AND INVESTMENT MADE IS CONCERNED, PRACTICALLY IT HAS NO SIGNIFICANCE AS BE ING AN INTERNAL DECISION BASED ON ITS CONVENIENCE, THE ASSESSEE MAY DECIDED TO FIRST INVEST AND THEN BORRO W THE FUND OR VICE VERSA. AS THE EVENTUAL AND ULTIMAT E EFFECT OF BOTH THE APPROACH WOULD BE SAME (I.E. SHORTAGE OF ITS OWN FUND AND NEED OF BORROWING THE SAME), THEREFORE, NO UNDUE IMPORTANCE OR RELEVANCE HAS BEEN GIVEN TO THE ASPECT OF NEXUS THEORY, WHILE DECIDING THE ISSUE UNDER CONSIDERATION. IN THIS REG ARD, THE DECISION OF THE HON'BLE HIGH COURT OF ALLAHBAD IN THE CASE OF CIT VS. H. R. SUGAR FACTORY P. LTD. (187 IT R 363 ALL) PROVIDES SUFFICIENT GUIDANCE. THEIR LORDSH IP HELD THAT - 'HAD THIS MONEY BEEN ADVANCED TO THE DIRECTORS, IT WOULD HAVE BEEN AVAILABLE TO THE ASSESSEE FOR ITS BUSINESS PURPOSE AND TO THAT EXTENT IT MIGHT NOT HAVE BEEN NECESSARY TO BORROW FROM THE BANK. THEREFORE THE ITO WAS RIGHT IN DISALLOWING THE DIFFERENCE BETWEEN INTEREST PAID TO THE BANKS AND INTEREST RECOVERED FROM THE DIRECTORS ......... ' 3.3 IN VIEW OF THE ABOVE DISCUSSION AND ALSO AFTER CONSIDERING THE ASSESSEE'S EXPLANATION, IT IS HELD THAT THE STAND T AKEN BY THE ASSESSEE IS NOT TENABLE AND ACCEPTABLE EVEN ON PRIM A FACIE GROUND. IN THIS REGARD, RELIANCE IS ALSO PLACED ON THE DECI SION OF HONOURABLE ITAT MUMBAI BENCH 'SMC' IN THE CASE OF ACIT VS. DAK SHESH ITA NOS. 624, 2213 & 2150 AHD OF 09 & C.O. NO. 54 AHD OF 09 PAGE 9 S.SHAH (2004) (90 ITD 519)- A.Y.98-99. THE GIST OF THE DECISION IS REPRODUCED AS UNDER: THE ASSESSEE MADE INVESTMENT IN SHARES BY OBTAINING BORROWED LOANS. DURING ASSESSMENT PROCEEDINGS, THE ASSESSEE CLAIMED DEDUCTION APPARENTLY U/S.57(III) IN RESPECT OF INTE REST PAID ON SUCH BORROWED FUNDS. THE AO NOTICED THAT DIVIDEND INCOME WAS EXEMPT FROM TAX IN THE HANDS OF THE RECEIVER, AS PE R THE PROVISIONS OF SECTION 10(33) RWS 115(O). THE AO HEL D THAT SINCE THE INCOME WAS EXEMPT FROM TAX, EXPENDITURE INCURRE D FOR EARNING OF SUCH INCOME COULD NOT BE ALLOWED. ON APPEAL, THE COMMISSIONER (APPEALS) ALLOWED DEDUCTION. ON APPEAL BY THE REVENUE: HELD CHAPTER IV, PROVIDES FIVE HEADS OF INCOME, THE FIRS T FOUR BEING SPECIFIC HEADS OF INCOME, WHEREAS THE FIFTH ONE IS RESIDUARY IN NATURE. INCOME OR EXPENDITURE HAS TO FALL UNDER A S PECIFIC HEAD OF INCOME IN WHICH EVENT THE CLAIM OF AN ASSESSEE CAN BE CONSIDERED UNDER SUCH SPECIFIC HEAD. IN THE INSTANT CASE, THE ASSESSEE APPEARED TO HAVE CLAIMED DEDUCTION UNDER S ECTION 57(III). IN ORDER TO ALLOW DEDUCTION U/S.57(III), T HE ASSESSEE HAS TO SHOW THAT THE DIVIDEND INCOME IS ASSESSABLE U/S.56 WHEREAS IN THE INSTANT CASE, DIVIDEND INCOME WAS EXEMPT FROM T AX BY VIRTUE OF THE PROVISIONS OF SECTION 10(33). AT ANY RATE, S ECTION 14A, EXPRESSLY PROHIBITS ALLOWANCE OF SUCH CLAIMS. (PARA 22) SECTION 14A IS PART OF CHAPTER IV. IN OTHER WORDS, IT APPLI ES TO EXPENDITURE REFERABLE TO ANY HEAD OF INCOME REFERRED TO IN SECT ION 14. IT WAS CONTENDED THAT DIVIDEND INCOME IS NOT EXEMPT FROM T AX BUT THE LEGISLATURE HAS INTENDED TO COLLECT THE TAX INDIREC TLY BY DEDUCTING TAX IN THE HANDS OF COMPANY. THIS CONTENTION CANNOT BE APPRECIATED. THERE ARE LAKHS OF SHAREHOLDERS WHOSE INCOME FALLS BELOW THE TAXABLE LIMIT AND IN THEIR CASE THERE MAY NOT BE ANY ITA NOS. 624, 2213 & 2150 AHD OF 09 & C.O. NO. 54 AHD OF 09 PAGE 10 ASSESSABLE INCOME WHICH IS LIABLE TO TAX EVEN IF DI VIDEND INCOME IS HELD TO BE TAXABLE IN THE HANDS OF SUCH ASSESSEE S. HENCE, IF THE INTENTION OF THE LEGISLATURE IS ONLY TO COLLECT THE TAX FROM THE RECIPIENTS OF THE DIVIDEND THROUGH MEDIUM OF COMPAN Y, THEN THERE SHOULD HAVE BEEN A PROVISION, WHEREBY THE COMPANY S HOULD NOT BE MADE TO PAY TAX IN RESPECT OF THAT PART IN THE D IVIDEND, WHICH IS ATTRIBUTABLE TO ASSESSEE WHO HAS NOT TAXABLE INCOME . IN THE ABSENCE OF SUCH A PROVISION, IT CANNOT BE SAID THAT THE TAX IS COLLECTED FROM THE COMPANY THOUGH THE LEGISLATURE I NTENDED TO COLLECT TAX FROM THE RECIPIENTS OF THE DIVIDENDS. A T ANY RATE, SECTION 14A IS COUCHED IN SPECIFIC TERMS, WHICH DO NOT LEAVE ANY ROOM FOR DOUBT OR DISPUTE WITH REGARD TO THE FACT T HAT IN ORDER TO CLAIM DEDUCTION OF EXPENDITURE IN RELATION TO A PAR TICULAR INCOME, THE ASSESSEE HAS TO SHOW THAT THE SAID INCOME FORMS PART OF THE TOTAL INCOME. THUS, LOOKING AT FROM ANY ANGLE, THE ASSESSEE WAS NOT ENTITLED TO CLAIM DEDUCTION OF THE INTEREST REF ERABLE TO THE AMOUNT BORROWED FOR THE PURPOSE OF INVESTMENT IN SH ARES. NO DOUBT, THE ASSESSEE RAISED AN ALTERNATIVE PLEA THAT THE SHARES AS AND WHEN ARE SOLD, THE INCOME/LOSS IS ASSESSABLE TO TAX UNDER THE HEAD 'CAPITAL GAINS' IN WHICH EVENT EXPENDITURE HAS TO BE ALLOWED AS DEDUCTION. HOWEVER, THE ASSESSEE HAD NOT SOLD AN Y SHARES TILL DATE AND SO FAR AS THE YEAR UNDER CONSIDERATION WAS CONCERNED, THE CONTENTION OF THE ASSESSEE WAS ACADEMIC. UNDER THE CIRCUMSTANCES, THE ORDER OF THE COMMISSIO NER (APPEALS) WAS REVERSED AND THE ORDER OF THE AO WAS UPHELD. 3.4 AFTER CONSIDERING ALL THE FACTS AND CIRCUMSTANC ES AND COURTS DECISION AS NARRATED ABOVE, IT IS CONCLUDED THAT TH E PROVISION OF SECTION 14A IN RESPECT OF INVESTMENT IN EQUITY SHAR ES IS SQUARELY APPLICABLE IN THE ASSESSEES CASE. ACCORDINGLY DIS ALLOWANCE ON ITA NOS. 624, 2213 & 2150 AHD OF 09 & C.O. NO. 54 AHD OF 09 PAGE 11 ACCOUNT OF DIVERSION OF INTEREST BEARING FUND TOWAR DS INVESTMENT HAVING NO TAXABLE RETURN IN THE FORM OF EQUITY SHAR ES HAS BEEN WORKED OUT AS ENTERED IN ORDER SHEET DATED 7/12/200 7 BEFORE THE REPRESENTATIVES OF ASSESSEE. THE TOTAL AVAILABLE F UND (INTEREST FREE AS WELL AS INTEREST BEARING) IS RS. 497 CRORE. INT EREST PAID IS RS. 60.61 CRORE. THEREFORE THE AVERAGE COST OF INVESTM ENT IS 12%. THE INTEREST SPENT U/S 14A TOWARDS THE INVESTMENT FOR T HE PURPOSE OF EARNING TAX FREE DIVIDEND OF INCOME IS WORKED OUT A S UNDER: I) INVESTMENT IN EQUITY SHARES RS.199,83,21,000 II) RATE OF INTEREST (AS CALCULATED ABOVE) 12% III) TOTAL PROPOSED DISALLOWANCE RS.23,97,98,520 IN VIEW OF THE ABOVE, THE EXPENDITURE U/S 14A IS ES TIMATED AT RS.23,97,98,520. THIS EXPENDITURE IS DISALLOWED FO R DEDUCTION FROM THE COMPUTATION OF TOTAL INCOME OF THE ASSESSEE. 4. BEING AGGRIEVED BY THE ORDER OF THE A.O., THE AS SESSEE CARRIED THE MATTER BEFORE THE CIT(A) WHO HAS DELETED THE ADDITI ON BY DISCUSSING THIS ISSUE IN GREAT LENGTH FROM PAGE 2 TO 20. THE OBSERVATION REGARDING DELETION OF ADDITION IN PARAGRAPH 4.3 AT PAGE NO.20 IS AS UNDER : 4.3 THE MATTER HAS BEEN CONSIDERED. AS BROUGHT OU T BY THE AUTHORISED REPRESENTATIVE, THIS ISSUE HAS BEEN A MA TTER OF CONTENTION IN THE PRECEDING ASSESSMENT YEAR ALSO I. E. ASSESSMENT YEAR 2004-05. THE ARGUMENTS OF BOTH THE SIDES AS A LSO THE FACTS OF CASE ARE SIMILAR FOR THIS YEAR ALSO. THEREFORE, CO NSIDERING THE FACTUAL POSITION AS ALSO THE LEGAL POSITION AS NARRATED FOR THE APPELLATE ORDER DATED 26/09/2007 FOR ASSESSMENT YEAR 2004-05, IT IS HELD THAT SUCH AD-HOC DISALLOWANCE, WITHOUT BRINGING SPECIFIC FACT S ON RECORD ABOUT THE EXPENSES INCURRED RELATED TO THE EXEMPTED INCOM E, IS NOT ITA NOS. 624, 2213 & 2150 AHD OF 09 & C.O. NO. 54 AHD OF 09 PAGE 12 ALLOWABLE. HENCE, FOLLOWING THE SAME FOR THIS YEAR ALSO, THE ADDITION OF RS.23,97,98,520/- IS DELETED. 5. NOW, THE REVENUE IS BEFORE US. IT WAS CONTENDED BY THE LD. C.I.T. D.R., SHRI B. K. S. PANDYA THAT THE DEDUCTION U/S. 80M WA S RELEVANT IN THE PRESENT CASE UP TO A.Y. 97-98 WHEN THE PROVISIONS OF SECTIO N 14A WERE NOT BROUGHT INTO STATUTE. THE PROVISIONS OF SECTION 14A WAS BR OUGHT INTO STATUTE BY THE FINANCE ACT, 2001 W.E.F. 01.04.2001 AND RELEVANT FO R THE ASSESSMENT YEAR 2001-02. HE ALSO RELIED UPON IN CASE OF ITO VS. DAGA CAPITAL MANAGEMENT PVT. LTD. (2008) 119 TTJ (MUM) (SB) 289 AND ARGUED THAT PROPORTIONATE DISALLOWANCE U/S. 14A HAD BEEN RIGHTLY MADE BY THE A.O. AND SAME MAY BE CONFIRMED. ON THE OTHER HAND, SHRI S. R. SHAH INVI TED OUR ATTENTION AT PAGE NO.8 OF THE ASSESSMENT ORDER WHEN THE INVESTMENT BE FORE THE ASSESSMENT YEAR 1997-98 WAS AT RS.199.83 CRORES. THE ASSESSEE MADE THE INVESTMENT FOR THE PURPOSES OF BUSINESS OUT OF BORROWED FUND A ND THEREFORE THE DEDUCTION U/S.80M WAS ALLOWABLE IN THE EARLIER YEARS. MOREOV ER, THE ASSESSEE IS IN THE BUSINESS OF BORROWING AND LENDING FOR WHICH INTERES T IS PAID AND EARNED. IN ALL THE ASSESSMENT YEARS IN PARTICULAR, UP TO 96-97, IT AT HAS DELETED SUCH DISALLOWANCES MADE BY THE A.O. AND THE DEDUCTION U/ S. 80M HAS BEEN ALLOWED. THE HONBLE ITAT HAD DELETED THE ADDITION IN A.Y. 04-05 ON SIMILAR AND IDENTICAL FACTS ON PAGE NOS. 111 AND 112 OF THE PAPER BOOK. HE FURTHER ALSO ARGUED THAT DURING THE YEAR BORROWING OF THE A PPELLANT COMPANY UNDER THE HEAD SECURED LOAN HAD REDUCED FROM RS.203 CRO RES TO 146 CRORES AND UNSECURED LOAN FROM 384 CRORES TO 351 CRORES. TH EREFORE, THE CIT(A) ORDER MAY PLEASE BE CONFIRMED. ITA NOS. 624, 2213 & 2150 AHD OF 09 & C.O. NO. 54 AHD OF 09 PAGE 13 6. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE FACTS OF THE CASE, THERE IS NO DISPUTE TO THE FACT THAT THE ASSESSEE H AS RAISED THE LOAN OF RS.297.75 CRORES UP TO 97-98 AND MAJORITY OF INVEST MENT HAS BEEN MADE BEFORE 97-98 AND THE ASSESSEE HAD BEEN CLAIMED DEDU CTION U/S. 80M OF THE ACT. THE A.O. IN THIS YEAR HAD MADE A DISALLOWANCE OF THE INTEREST EXPENSES INCURRED FOR THE EARNING THE DIVIDEND. WHEREAS THE LD. CIT (A) AND THE TRIBUNAL IN PARTICULAR UP TO 1996-97 HAD DELETED TH E DISALLOWANCE SO MADE ALONG WITH THE DEDUCTION U/S.80M OF THE ACT ON THE GROSS DIVIDEND RECEIPT. THOUGH IN SUCH A SITUATION, THE INTEREST BEARING FU ND ARE BOUND TO MERGE THAT THE ASSESSEE IN CAPITAL WHICH IS NON INTEREST BEARI NG FUND. THERE IS NO DISPUTE TO THE FACT THAT THE ASSESSEE HAVING NON INTEREST B EARING FUND AS UNDER: (I) SHARE CAPITAL RS.256.97 CRORES (II) DEPRECIATION RESERVE RS. 5.81 CRORES (III) PROVISION FOR NPA RS.110.86 CRORES TOTAL FUNDS RS.373.64 CRORES (IV) INVESTMENTS RS.199.83 CRORES IN VIEW OF THE DECISION OF THE ITAT, DELHI BENCH, I N CASE OF MARUTI UDHYOG LTD. VS. DCIT 92 ITD 119, NEXUS BETWEEN THE BORROWED FUNDS AND INVESTMENTS CAN BE SAID TO BE ESTABLISHED ONLY WHERE IT IS SHOW N THAT INTEREST FREE FUNDS ARE NOT AVAILABLE WITH THE ASSESSEE. IN THE PRESEN T CASE, THERE IS NO NEXUS OF SUCH KIND PROVED BY THE LD. A.O. AS PER FOR THE PA ST HISTORY OF THE ASSESSEE, THE DEPARTMENT HAS BEEN TAKING THE VIEW THAT NO EXP ENSES INCLUDING THE INTEREST HAD BEEN ATTRIBUTED TO DIVIDEND FOR COMPUT ING THE DEDUCTION U/S. 80M OF THE ACT. THE ASSESSEE HAVING NON INTEREST BEARI NG FUND AS MENTIONED HEREINABOVE AND NO NEXUS BETWEEN BORROWED FUND AND THE INVESTMENT HAVING ITA NOS. 624, 2213 & 2150 AHD OF 09 & C.O. NO. 54 AHD OF 09 PAGE 14 BEEN ESTABLISHED BY THE DEPARTMENT CANNOT HELP THE REVENUE AS ARGUED BY THE LD. CIT. D.R. THEREFORE, IN THE FACTS AND CIRC UMSTANCES OF THE CASE, WE FIND NO INFIRMITY IN THE ORDER OF CIT(A) WHO HAD RI GHTLY DELETED THE DISALLOWANCE MADE BY THE A.O. THUS, REVENUES APPEAL ON THIS GR OUND IS DISMISSED. 7. NOW WE ARE CONSIDERING THE DELETING THE LONG TER M CAPITAL GAIN OF RS.38,26,20,327/-. THE A.O. OBSERVED THAT THE APPEL LANT HAD SHOWN THE WORKING CAPITAL GAIN IN THE MANNER AS UNDER: LONG TERM CAPITAL GAINS RS.57,24,15 ,322/- LESS : EXEMPT U/S 10(38) RS. 45,08,06,234/ - TAXABLE CAPITAL GAIN RS. 12,16,09,0 88/- LESS : LONG TERM CAPITAL LOSS RS. -38,33,05,327/- LONG TERM CAPITAL LOSS TO BE CARRIED FORWARD RS. -2616,96,239/- THE OBSERVATION OF THE A.O. IS REPRODUCED AS UNDER: IN ANNEXURE-A ATTACHED WITH RETURN OF INCOME, THE DETAIL OF CAPITAL GAIN AND LOSS MADE BY THE ASSESSEE IS SUBMITTED. I T IS PERTINENT TO MENTION HERE THAT EXEMPTION U/S.10(38) WAS APPLICAB LE FROM 1/10/2004 ON SUCH TRANSACTIONS OF SALE ON WHICH STT (SECURITY TRANSACTIOJN TAX) WAS PAID. THERE WERE 3 CATEGORY OF SALES WITH ASSESSEE. CATEGORY 1 WAS SUCH SALES CARRIED OUT PR IOR TO 1/10/2004. CATEGORY 2 WAS SUCH SALES CARRIED OUT ON OR AFTER 1 /10/2004 ON WHICH STT WAS PAID. CATEGORY 3 WAS SUCH SALES CARR IED OUT ON OR AFTER 1/10/2004 ON WHICH STT WAS NOT PAID . THE DISPUTE IS IN RESPECT OF ONLY THOSE SALES WHICH ARE CARRIED OUT AFTER 1/10/2004 AND ON WHICH STT IS NOT PAID. THES E SALES ARE AS UNDER: SCRIP NOS PUR. DATE INDEX COST INDEXED COST SALE PRICE GAIN /LOSS GSFC 5473920 96-97 305 684857273 1077808167 695187840 -38260327 KIRTI PLASTIC 200 71-72 100 200000 960000 275000 -685000 ITA NOS. 624, 2213 & 2150 AHD OF 09 & C.O. NO. 54 AHD OF 09 PAGE 15 AS FAR AS THE SALE OF KIRTI PLASTIC IS CONCERNED, IT IS NOT ACTUALLY A SALE BUT REDEMPTION OF REDEEMABLE PREFERENCE SHARES WHICH THE ASSESSEE WAS HOLDING FOR A LONG TIME. THEREFORE TH E QUESTION OF ANY DEVICE IN SUCH REDEMPTION OR QUESTION OF NON PAYMEN T OF STT ON SUCH REDEMPTION DOES NOT ARISE. THE DISPUTE IS THE REFORE IN RESPECT OF SALE OF GSFC SHARES ONLY, WHICH WERE DELIBERATEL Y SOLD OFF MARKET AND ON WHICH STT WAS NOT PAID BY THE ASSESS E TO CLAIM THE LOSS U/S 45 OF I.T. ACT. IF THIS SALE HAD TAKEN PL ACE IN STOCK EXCHANGE, STT WAS PAYABLE. IF STT IS PAYABLE, THE CAPITAL GAIN / CAPITAL LOSS ARISING FROM SUCH SALE WOULD BE EXEMPT U/S 10(38) OF I.T. ACT. IN THAT CASE ASSESSEE COULD NOT HAVE CLAIMED THE LOSS OF RS.38.26 CRORE ARISING OUT OF SUCH TRANSFER. THE S HARES OF GSFC WERE SOLD TO GUJARAT SATE INVESTMENT LTD. (GSIL). IN FACT BOTH, THE ASSESSEE AND GSIL ARE WHOLLY OWNED SUBSIDIARIES OF GOVERNMENT OF GUJARAT (GOG). THEREFORE IT WAS A TRANSFER BETWEEN ONE SUBSIDIARY OF GOG TO OTHER SUBSIDIARY OF GOG. 2.2 IT WAS FURTHER FOUND THAT OFF MARKET SALES AR E NOT PERMITTED BY SEBI CIRCULAR NO. SMDRP/POLICY/CIR-32/99, DATED SEPTEMBER 14, 1999. THE CIRCULAR OF SEBI AS UNDER WAS BROUGH T TO THE NOTICE OF ASSESSEE TO EMPHASIZE THAT THE SALE OF SHARES OF GSFC TO GSIL ARE NOT VALID SALE IN THE EYES OF LAW. THE ASSESSEES REPLY WAS CONSIDERED BY THE LD. A.O. THE APPELLANT HAD NOT PAID STT ON THESE TRANSACTIONS AND TRANSACTIONS WER E OFF MARKET TRANSACTION. THE APPELLANT HAD INTIMATED TO THE BSE THAT GSIL HA S PROPOSED TO ACQUIRE 61.87% OF THE SHARE HOLDING GSFC FROM GIIC VIDE LET TER DATED 25.02.2007 PRIOR TO THE DATE OF TRANSACTION. THE APPELLANT ALS O CLAIMED BEFORE THE A.O. THAT THESE PAYMENTS WERE TRANSFERRED FROM PROMOTER TO PROMOTER COVERED U/S.47(IV) OF THE IT ACT IN CATEGORY OF NO TRANSFER . THE LD. A.O. ALSO ANALYZED THE TERMS AND CONDITIONS THAT AGREEMENT DATED 07.03 .2005 BETWEEN GIIC AND ITA NOS. 624, 2213 & 2150 AHD OF 09 & C.O. NO. 54 AHD OF 09 PAGE 16 GSIL ON PAGE NOS. 5,6 & 7 OF THE ASSESSMENT ORDER. FINALLY, IN PARA NOS. 2.6 & 2.7, THE A.O. HELD AS UNDER: 2.6 I THEREFORE HOLD THAT THE AGREEMENT BETWEEN A SSESSEE AND GI1C STIPULATES THAT QUESTION OF SALE WILL ARISE ON LY WHEN THE SHARES OF GSFC ARE SOLD IN FUTURE BY GSIL TO A STRATEGIC P ARTNER. THE TRANSFER AT PRESENT IS ONLY AN ARRANGEMENT TO SECUR E FUNDS FOR THE ASSESSEE, WHICH CANNOT BE TERMED AS TRANSFER. SECONDLY, SUCH TRANSFER IS INDIRECTLY COVERED IN CO MBINED READING OF SECTION 47(IV) AND SECTION 47(V) OF I.T. ACT, AND THEREFORE NO TRANSFER. THIRDLY, ASSESSEE HAS CLEARLY EXPRESSED ITS INTENTI ON THAT IT WANTED TO SAVE STT BY ENTERING INTO SUCH OFF MARKET DEAL, WHICH COMBINED WITH THE PROVISIONS OF SECTION 10(38) IS A VOIDANCE OF TAX. THIS IS A COLOURABLE DEVICE TO AVOID TAX AND NOT AL LOWED. FOURTHLY , THE INTENTION OF HE GOVERNER OF GUJARAT IS OBVIOUS FROM THE AGREEMENT THAT IN THIS TRANSACTION , THE T RANSFEROR AND TRANSFEREE IS THE SAME, I.E, HE GOVERNER OF GUJARAT . THEREFORE THERE IS NO REASON TO TREAT IT AS TRANSFER LASTLY THE OFF MARKET SALE IS NOT A VALID SALE AS P ER THE CIRCULAR OF SEB1 AND THEREFORE THE SUCH DEAL IS REQUIRED TO BE SEEN AS INVALID SALE OR NO TRANSFER. 2.7 IN VIEW OF THESE FACTS, THE CLAIM OF RS.38,26,2 0,327 AS CAPITAL LOSS UNDER THE HEAD LONG TERM CAPITAL GAIN IS DIS ALLOWED FOR DEDUCTION. THERE WILL BE NO CAPITAL LOSS TO BE CAR RIED FORWARD. 8. THE LD. CIT(A) HAD DELETED THE ADDITION BY OBSER VING PARAGRAPHS NOS. 3.5 TO 3.10 WHICH ARE AS UNDER: 3.5. THE MATTER HAS BEEN GIVEN SERIOUS CONSIDERATI ON. AS FAR AS THE ISSUE OF 'OFF MARKET' DEAL IS CONCERNED, NEITHE R THE ASSESSING OFFICER HAS BEEN ABLE TO ESTABLISH NOR DO I THINK T HERE IS ANY BAN PER ITA NOS. 624, 2213 & 2150 AHD OF 09 & C.O. NO. 54 AHD OF 09 PAGE 17 SE ON SUCH A DEAL. THE DEMAT FORM INFORMING ABOUT THE TRANSFER OF SHARES SEEMS TO HAVE BEEN DESIGNED TO INCLUDE SUCH TRANSACTIONS AS WELL. I ALSO THINK THAT IN CASE, SUCH A BAN HAS TO COME IT HAS TO COME THROUGH THE COMPANIES ACT AND NOT THROUGH SEBI ACT, WHICH IS PRIMARILY FOR REGULATION OF THE SECURITY EXCHANG ES. THE FACTUAL MATRIX HERE IS THAT THE SHARES HAVE BEEN TRANSFERRE D FROM THE APPELLANT-COMPANY TO M/S. GSIL AT THE MARKET PRICE PREVAILING ON THE DATE OF TRANSACTION AND THE CONCERNED COMPANY M/S. GSFC HAS TAKEN THAT FACT ON RECORD AND THE TRANSFEREE-COMPAN Y HAS RECEIVED THE MONEY FROM THE TRANSFEROR-COMPANY. THE COMPANY M/S. GSFC, WHILE TRANSFERRING THE SHARES, HAS NOT RAISED ANY O BJECTION TO THE MANNER OF TRANSFER, WHICH UNDER NORMAL CIRCUMSTANCE S IT SHOULD HAVE, IF SUCH TRANSACTIONS WERE PROHIBITED BY LAW. 3.6. REGARDING THE STRONG EXCEPTION TAKEN BY THE A SSESSING OFFICER ABOUT THE ASSESSEE HAVING UNDERTAKEN THE 'OFF MARKE T' TRANSACTION AS A DELIBERATE MEASURE OF SAVING S.T.T. AND COMPUT ING CAPITAL LOSS, IN MY VIEW, THIS CANNOT BE HELD AGAINST AN ASSESSEE . IN MY VIEW, THE PROVISIONS OF THE ACT ENCOMPASS BOTH THE SITUATIONS FOR THE PURPOSE OF COMPUTATION OF CAPITAL GAINS, I.E. WHETHER A TRA NSACTION IS SUBJECT TO S.T.T. AND WHETHER IT HAS NOT BEEN SUBJECT TO S. T.T. THERE IS NO EXPRESS BAR THAT CAPITAL GAINS CAN BE COMPUTED ONLY BY INVOKING SECTION 10(38). IF THE ASSESSEE HAS OPTION OF PURSU ING EITHER OF THE METHOD OF DISPOSING OFF THE SHARES AND COMPUTING IT S PROFIT GAINS, THE ASSESSING OFFICER WILL NOT BE ABLE TO TAKE ADVE RSE VIEW IF A PARTICULAR VIEW IS TAKEN. IN FACT, IN SPIRIT S.T.T. IS ONLY A WAY OF COLLECTION OF TAX AT SOURCE AS FAR AS CAPITAL GAINS IS CONCERNED. THE ACTUAL TAXABILITY OF CAPITAL GAINS AND ITS QUANTUM, OTHERWISE, HAS TO BE DETERMINED BY THE SUBSTANTIVE PROVISIONS OF THE INCOME-TAX ACT. 3.7. FURTHER, THE ASSESSING OFFICER'S STAND THAT TH E COMPANIES M/S. GIIC AND M/S, GSIL ARE SUBSIDIARIES OF GOVERNMENT O F GUJARAT MAY NOT BE A LEGALLY TENABLE STATEMENT. GOVERNMENT OF G UJARAT IS 'STATE' ITA NOS. 624, 2213 & 2150 AHD OF 09 & C.O. NO. 54 AHD OF 09 PAGE 18 WHEREAS THE COMPANIES ARE THE CREATION OF THE STATU TE ENACTED BY THE STALE. AS PER THE COMPANIES ACT, A COMPANY IS A DISTINCT LEGAL ENTITY WHICH OPERATES AS PER THE LAW CONTAINED IN T HE COMPANIES ACT. THE CONCEPT OF 'SUBSIDIARY' COMES ONLY IN CONT EXT OF THE COMPANIES ACT AND HAS NO LEGAL RELEVANCE IN CONTEXT OF A 'STATE'. THEREFORE, IN MY VIEW THERE IS NO CASE OF APPLICABI LITY OF SECTION 47(IV) AND SECTION 47(V) TO THE FACTS OF THE CASE. AS STATED IN THE PRECEDING PARAGRAPH, THERE HAS BEEN TRANSFER OF THE TITLE AND MERE HAS ALSO BEEN EXCHANGE OF FUNDS AND THEREFORE UNDER NORMAL CIRCUMSTANCES IT SHOULD BE RECORDED AS A TRANSFER U NDER THE INCOME- TAX ACT. 3.8. AS AGAINST ABOVE, THE MANNER IN WHICH THE TRA NSACTION HAS BEEN NEGOTIATED AND THE ATTENDANT CIRCUMSTANCES WOU LD, HOWEVER, DETERMINE WHETHER IT WAS AN ARRANGEMENT OR NOT. THE AGREEMENT SINGED BETWEEN M/S. GIIC AND M/S. GSIL, THE LANGUAG E OF THE AGREEMENT, THE NEED OF FINANCE AND THE INCLUSION OF FUTURE COURSE OF ACTION, IN THE AGREEMENT, ALONG WITH MATTER LIKE OF F-MARKET TRANSACTION WOULD IN FACT GO TO SUGGEST THAT IT WAS AN ARRANGEMENT TO MEET DIRE FINANCIAL NEEDS OF THE ASSESSEE. THE ARRA NGEMENT WAS CLEARLY PRESIDED OVER BY THE GOVERNMENT OF GUJARAT. BUT THE MERE FACT OF ARRANGEMENT CANNOT LEAD THE ASSESSING OFFIC ER TO TREAT THE ENTIRE TRANSFER AS INVALID, UNLESS HE IS ALSO ABLE TO PROVE THAT IT IS A COLOURABLE ARRANGEMENT WITH THE INTENTION TO REDUCE THE TAX LIABILITY. AS STATED EARLIER, IT DOES NOT APPEAR THAT THE ASSE SSEE FLOUTED ANY RULES AND REGULATIONS IN CARRYING OUT THIS TRANSACT ION- IT IS A STANDARD PRACTICE, IN ANY GROUP OR CORPORATE OR EVEN INDIVID UALS TO ENCASH THE SHARES AND REALIZE THE MONEY IN CASE OF NEED OF MON EY. I DO NOT THINK IT HAS ANY TAX AVOIDANCE ANGLE AS WELL. IF SI MILAR AMOUNT HAD BEEN TAKEN AS LOAN, ASSESSEE WOULD HAVE HAD TO INCU R THE INTEREST EXPENDITURE AS WELL. ITA NOS. 624, 2213 & 2150 AHD OF 09 & C.O. NO. 54 AHD OF 09 PAGE 19 3.9. FINALLY, THE ASSESSING OFFICER'S STAND THAT T HE TRANSACTION WILL BE CONSIDERED AS COMPLETE ONLY WHEN M/S. GSIL WILL SELL IT, DOES NOT SEEM TO BE A VERY SOUND PROPOSITION. IT IS NOT THE CASE THAT THE SHARES OF M/S. GSFC HAVE BEEN HANDED OVER TO M/S. GSIL ON LIEN. WITH EFFECT FROM THE DATE OF TRANSFER OF THE SHARES , M/S. GIIC HAS CEASED TO BE THE SHAREHOLDER I.E. EXTINGUISHED IT R IGHTS. THEREAFTER, AS AND WHEN M/S. GSIL TRANSFERS THE SHARES, CONSEQU ENCES WOULD HAVE TO BE TREATED IN THEIR HAND AND SALE BY M/S. G SIL, WHENEVER IT TAKEN PLACE CANNOT BE TREATED AS SALE OR TRANSFER O F THE ASSESSEE. 3.10 THEREFORE, CONSIDERING ALL THE LEGAL ISSUES AN D FACTS, I THINK THE ASSESSING OFFICER HAS BEEN UNJUSTIFIED IN REJECTING THE APPELLANTS CLAIM OF CAPITAL LOSS OF RS.38,26,20,327/-. THE AP PELLANTS GROUND OF APPEAL IS ALLOWED. 9. NOW THE MATTER IS BEFORE US. LD. D.R. VEHEMENTL Y RELIED ON THE ORDER OF THE A.O. AND CONTENDED THAT THE TRANSACTIONS WERE N OT ROUTED THROUGH STOCK EXCHANGE AND TRANSFER TOOK PLACE ON HOLIDAY ITSELF. IT HAD BEEN INTIMATING TO SEBI. HE CLAIMED THAT THESE TRANSACTIONS ARE SHAM AND BOGUS AND NO LONG TERM CAPITAL LOSS WAS THERE. THEREFORE, HE PRAYED TO CONFIRM THE ORDER OF THE A.O. FROM THE SIDE OF THE APPELLANT, LD. COUNSEL F OR THE APPELLANT RELIED UPON THE ORDER OF THE CIT(A) AND ARGUED THAT LD. CIT(A) HAS CONSIDERED ALL THE FACTS OF THE TRANSACTION AND DELETED THE ADDITION. 10. WE HAVE PERUSED THE ORDER OF THE AUTHORITIES BE LOW. THE LD. A.O. HAD NOT BROUGHT ON RECORD ANY EVIDENCE OR INSTRUCTION W HICH PROHIBITS THE OFF MARKET TRANSACTION OF SHARES. THE ASSESSEE HAS ROU TED THESE TRANSACTIONS FROM DEMAT ACCOUNT. THERE IS NO PROHIBITION IN INC OME TAX LAW ON SUCH TRANSFERS OF SHARE. THE SHARES WERE TRANSFERRED AT THE MARKET PRICE ON THE ITA NOS. 624, 2213 & 2150 AHD OF 09 & C.O. NO. 54 AHD OF 09 PAGE 20 DATE OF TRANSACTION. THERE WAS NO OBJECTION FROM T HE TRANSFEREE THAT OFF MARKET TRANSACTION IS PROHIBITED BY THE LAW. IT IS IMMATERIAL WHETHER ASSESSEE HAS PAID STT ON THESE TRANSACTIONS OR NOT BUT CAPIT AL GAIN HAS TO BE CALCULATED AS PER THE PROVISIONS OF INCOME TAX ACT. THE APPELLANT HAD SOLD SHARES OF GSFC TO GSIL AS PER THE AGREEMENT DATED 0 7 TH MARCH, 2005. THEREFORE, THE TRANSFER OF CAPITAL ASSETS HAD TAKEN PLACE ON ACCOUNT OF SALE. THE APPELLANT HAD RECEIVED CONSIDERATION OF RS.69,5 1,87,840/- VIDE CHEQUE DATED 07 TH MARCH, 2005. FURTHER, THE SHARES WERE TRANSFERRED TO THE DEPOSITORY UTI SECURITY TO THE BUYER. THESE SHARES WERE REFLECTED IN THE DEMAT ACCOUNT OF THE BUYER. THE APPELLANT SOLD THE SE SHARES TO GSIL WHICH IS NOT A SUBSIDIARY COMPANY OF THE APPELLANT. THE COM MON FACTOR IS THAT BOTH THE APPELLANT AS WELL AS GSIL ARE OWNED BY THE GUJA RAT GOVERNMENT. BUT AS PER COMPANY LAW, BOTH THE COMPANIES ARE HAVING LEGA L STATUS UNDER THE COMPANIES ACT. THEREFORE, WE DISMISS THE APPEAL OF THE REVENUE ON THIS GROUND. 11. IN THE RESULT, THE REVENUES APPEAL IS DISMISSE D. C.O. NO. 54/AHD/09 (A.Y. 05-06) 12. THE SOLE GROUND OF C.O. FILED BY THE APPELLANT IS THAT THE CIT(A) HAS CONFIRMED THE INCLUSION OF SERVICE CHARGES OF RS.4, 49,95,181/-. THE FACTUAL MATRIX OF THE CASE IS THAT THE COMPANY RECEIVED AMO UNT OF RS.4,49,95,181/- TOWARDS THE SERVICES CHARGES FROM M/S. RELIANCE IND USTRIES LTD. FOR VERIFICATION OF THE PARTYS PROJECT REPORT FOR CONVERSION OF DEF ERRED SALES TAX INTO DEEMED ITA NOS. 624, 2213 & 2150 AHD OF 09 & C.O. NO. 54 AHD OF 09 PAGE 21 LOAN FROM THE APPELLANT DURING THE PREVIOUS YEAR RE LEVANT TO ASSESSMENT YEAR 04-05. HOWEVER, MEANWHILE THE SCHEME OF CONVERSION OF DEFERRED SALES TAX INTO DEEMED LOAN STOOD WITHDRAWN BY THE GOVERNMENT OF GUJARAT VIDE G.R. DATED 17 TH SEPTEMBER, 2005 DUE TO WHICH THE APPELLANT WAS ENT ITLED TO RECEIVE THE SAID AMOUNT. AS PER LD. A.R. OF THE APPELLANT, THERE WAS NO SERVICE RENDERED AND NO INCOME COULD BE ACCRUED TO THE APPE LLANT BUT THE SAID AMOUNT STOOD ACCOUNTED FOR AS INCOME IN THE BOOKS O F ACCOUNT AND THEREFORE OFFERED FOR TAXATION DURING THE ASSESSMENT YEAR 04- 05 TO RECTIFY THE SITUATION CONSEQUENT TO ISSUE TO THE G.R. THE ENTRY WAS REVE RSED BY THE SAME AMOUNT BY DEBITING THE P&L ACCOUNT DURING THE PREVIOUS YEA R RELEVANT TO PRESENT ASSESSMENT YEAR I.E. 05-06. FURTHER, WHILE FILING THE RETURN OF INCOME FOR THE ASSESSMENT YEAR 05-06, THE APPELLANT SUO MOTO DISAL LOWED THE AMOUNT OF RS. 4,49,95,181/- TOWARDS REVERSAL OF SERVICE CHARGES I NCOME. THE CLAIM FOR DEDUCTION OF SUCH SUM HAD ALREADY BEEN PLACED FOR A .Y.04-05. IN A.Y. 05-06, THIS CLAIM HAS BEEN REJECTED BY THE A.O., WHICH WAS CONFIRMED BY THE CIT(A) IN A.Y. 05-06 BECAUSE THE ADJUSTMENTS HAVE BEEN MAD E IN THE BOOKS FOR THE PERIOD OF PERTAINING FOR A.Y. 05-06. THE ASSESSEE FILED REVISED RETURN IN A.Y. 04-05 AND DEDUCTION OF THIS INCOME OF RS.4,49,95,18 1/- HAS BEEN CLAIMED BY THE APPELLANT IN REVISED RETURN WHICH HAS BEEN ACCE PTED BY THE CO-ORDINATE BENCH IN ITA NOS. 4215 & 4378/AHD/2007 FOR A.Y. 04- 05. THE OPERATIVE PORTION OF THE CO-ORDINATE BENCH DECISIONS IS AS UN DER:- 12. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSE D THE FACTS OF THE CASE. THE FINDINGS OF THE LD. CIT(A) THAT THE REAL INCOME WAS VERY MUCH IN EXISTENCE DURING THE PREVIOUS YEAR 200 3-04 I.E. ITA NOS. 624, 2213 & 2150 AHD OF 09 & C.O. NO. 54 AHD OF 09 PAGE 22 ASSESSMENT YEAR 2004-05 HAS NO VALIDITY IN VIEW OF OUR DECISION IN GROUND NO.1 OF THE ASSESSEE HEREINABOVE. THEREFORE , IN THE CIRCUMSTANCES AND FACTS OF THE CASE, THE MATTER IS RESTORED BACK TO THE FILE OF ASSESSING OFFICER WHO WILL DECIDE THE T AXABILITY OF INCOME AND EXCLUSION OF SERVICE CHARGES OF RS.4,49,95,181/ - IN THE ASSESSMENT YEAR 2004-06 IN VIEW OF OUR DECISION IN GROUND NO.1 HEREINABOVE BUT BY AFFORDING REASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. THUS, GROUNDS NO.2 AND 3 FO THE A SSESSEE ARE ALLOWED FOR STANTISTICAL PRUPOSES. 13. WE HAVE PERUSED THE ORDERS OF THE AUTHORITIES B ELOW, HEARD THE ARGUMENTS AND GONE THROUGH THE CO-ORDINATE BENCH DE CISION FOR A.Y. 04-05 WHEREIN SIMILAR INCOME HAS BEEN ALLOWED TO BE REDUC ED ON THE BASIS OF REAL INCOME THEORY. THUS, THE ORDER OF THE CIT(A) IS CO NFIRMED. 14. IN THE RESULT, THE ASSESSEES C.O. IS DISMISSED . ITA NO. 2150/AHD/2009 (A.Y. 06-07) 15. THE GROUNDS OF ASSESSEES APPEAL ARE AS UNDER: 1. THE ORDER PASSED BY THE COMMISSIONER OF INCOME TAX (APPEALS) IS ERRONEOUS AND REQUIRES TO BE MODIFIED. IT IS SUBMITTED THAT BE SO DONE NOW. 2. THE LEARNED CIT(A) HAS ERRED IN LAW AND FACTS IN UPHOLDING THE DISALLOWANCE OF RS.13,74,01,132 U/S. 14A OF THE INC OME TAX ACT, 1961 (HEREINAFTER REFERRED TO AS THE ACT) IN RESP ECT OF THE INTEREST EXPENSES INCURRED DURING YEAR HOLDING THAT INTEREST BEARING FUNDS WERE USED FOR EARNING EXEMPT INCOME. IT IS SUBMITT ED THAT ALL THE INVESTMENTS ON WHICH EXEMPT INCOME HAS BEEN EARNED WERE MADE PRIOR TO 1997-98 OUT OF OWNED FUNDS AND THE ITAT AF TER VERIFICATION OF FACTS IN THOSE YEARS HAD HELD THAT SUCH INVESTMENT HAVE BEEN MADE ITA NOS. 624, 2213 & 2150 AHD OF 09 & C.O. NO. 54 AHD OF 09 PAGE 23 OUT OF OWN FUNDS WHILE ADJUDICATING ON ISSUE OF DED UCTION U/S.80M OF THE ACT. IT IS SUBMITTED IT BE SO HELD NOW. 2.1 THE COMMISSIONER OF INCOME TAX (APPEALS) ERRED IN HOLDING THAT RULE 8D OF THE INOCME TAX RULES, 1962 (HEREINA FTER REFERRED TO AS THE RULES) IS RETROSPECTIVE IN ITS APPLICATION IN VIEW OF MUMBAI TRIBUNAL SPECIAL BENCH DECISION IN THE CASE OF ITO VS. DAGA CAPITAL MANAGEMENT (P) LTD. (119 TTJ 289) WITHOUT APPRECIAT ING THE FACTS OF THE CASE. IT BE SO HELD NOW. 2.2 THE LEARNED CIT(A) FAILED TO APPRECIATE THAT WH EN THERE WAS SATISFACTION AS REGARDS INVESTMENTS IN TAX FREE SEC URITIES OUT OF OWNED FUNDS PROVISIONS OF SUB-SECTION (2) AND (3) T O SECTION 14A OF THE ACT CANNOT BE INVOKED. IT IS SUBMITTED THAT IT BE SO HELD NOW. 2.3 THE LEARNED CIT(A) HAS ERRED IN UPHOLDING DISAL LOWANCE OF RS.13,74,01,132 IN LIGHT OF FACTS THE LEARNED CIT ( A) HAS DELETED THE DISALLOWANCE MADE FOR AY 2004-05 & A.Y. 2005-06. I T IS SUBMITTED THAT THE FACT THAT INVESTMENTS HAVE BEEN MADE OUT O F OWNED FUNDS AND NO BORROWED FUNDS HAVE BEEN USED AND THERE IS N O FRESH OR ADDITIONAL EVIDENCE WHICH REQUIRE DEVIATING FROM TH E STAND TAKEN FOR A.Y. 2004-05 & 2005-06. IT IS SUB KITTED IT BE SO HELD NOW. 2.4 THE LEARNED CIT(A) HAS ERRED IN DIRECTING THE A O TO APPLY RULE 8D OF THE RULES TO MAKE THE COMPUTATION FOR DISALLO WANCE. IT IS SUBMITTED THAT IN THE FACTS AND CIRCUMSTANCES RULE 8D OF THE RULES IS NOT APPLICABLE. IT BE SO HELD NOW. 16. ALL THE GROUNDS OF ASSESSEES APPEAL ARE REVOLV ING AROUND THE DISALLOWANCE OF RS.13,74,01,132 U/S. 14A OF THE IT ACT. THE A.O. OBSERVED THAT THE ASSESSEE MADE INVESTMENT OF RS.1,29,25,78, 858/- IN VARIOUS SHARES OF THE COMPANIES WHETHER QUOTED OR UNQUOTED. THE A SSESSEE HAD PAID INTEREST OF RS.17,77,61,139/- DURING THE YEAR ON VA RIOUS LOANS TAKEN TO INVEST OR TO MAINTAIN THESE INVESTMENTS. AS DIVIDEND INCO ME IS NOT A PART OF TAXABLE ITA NOS. 624, 2213 & 2150 AHD OF 09 & C.O. NO. 54 AHD OF 09 PAGE 24 INCOME AS PER SECTION 10(34) OF THE IT ACT. THEREF ORE, HE FOUND THAT THE INVESTMENTS IN EQUITY SHARES BEARING TAX FREE RETUR NS AMOUNTS TO DIVERSION OF THE BUSINESS FUNDS. THE A.O. HAS RELIED UPON IN CA SE OF HONBLE APEX COURT DECISION IN THE CASE OF MACDONNELL & CIT VS. H.R. S UGAR FACTORY PVT. LTD. 187 ITR 363 [ALL.] AND FINALLY, HE DISALLOWED U/S. 14 A OF THE IT ACT RS.13,74,01,132/- BY APPLYING THE RULE 8D. 17. THE ASSESSEE CARRIED THE MATTER BEFORE THE CIT( A) WHO HAS CONFIRMED THE ADDITION, WHICH IS REPRODUCED AS UNDER: 4.3 THE MATTER HAS BEEN GIVEN DUE CONSIDERATION. CONSEQUENT TO THE DECISION OF THE SPECIAL BENCH IN DAGA CAPITAL MANAG EMENT (P) LTD. (SUPRA), THERE IS A MATERIAL DIFFERENCE TO THE LEGA L APPROACH TO THE MATTER. ALTHOUGH IT IS A FACT THAT IN THE PRECEDIN G YEAR IT HAD BEEN HELD THAT SECTION 14A WOULD NOT BE APPLICABLE, THE INSER TION OF SUB-SECTIONS 2 & 3 TO SECTION 14A AND THE DECISION OF THE SPECIAL BENCH THAT RULE 8D IS OPERATIVE RETROSPECTIVELY, WOULD LEAD TO THE INFERE NCE THAT THE ONUS IS NOT ON THE DEPARTMENT TO SHOW THE NEXUS BETWEEN THE INCOME EXEMPT FROM TAXATION AND THE LIKELY EXPENSES INCURRED TO E ARN THAT INCOME. SUB-SECTION 3 SPECIFICALLY TAKES CARE OF THE APPELL ANTS CASE WHETHER NOTWITHSTANDING SUCH A CLAIM, APPLICABILITY OF SUB- SECTION 2 HAS BEEN PROVIDED FOR. AS HAS BEEN STATED BY THE SPL. BENCH , WHAT IS RELEVANT IS TO WORK OUT THE EXPENDITURE IN RELATION TO EXEMPT I NCOME AND TO EXAMINE WHETHER EXPENDITURE INCURRED BY ASSESSEE HA S RESULTED INTO EXEMPT INCOME OR TAXABLE INCOME. SINCE THERE IS NO ESTOPPEL IN INCOME-TAX PROCEEDINGS, OBVIOUSLY THE DECISION GIVE N IN THE PRECEDING YEARS CAN BE CHANGED IN THE LIGHT OF THE NEW JUDICI AL POSITION. THEREFORE, IN THE FACTS OF THE CASE, I HOLD THE DIS ALLOWANCE U/S.14A IS CALLED FOR. THE ASSESSING OFFICER MAY APPLY RULE 8 D TO MAKE THE COMPUTATION FOR THE DISALLOWANCE. ITA NOS. 624, 2213 & 2150 AHD OF 09 & C.O. NO. 54 AHD OF 09 PAGE 25 18. NOW THE ASSESSEE IS BEFORE US. THE LD. COUNSEL FOR THE APPELLANT CONTENDED THAT THE EXEMPTED DIVIDEND INCOME EARNED FROM THE INVESTMENTS MADE PRIOR TO 97-98, WHEN THE APPELLANT WAS GENERAT ING GOOD AMOUNTS OF PROFITS AND HAS SUFFICIENT AMOUNT OF OWNED FUND. I NTEREST BEARING FUNDS HAVE NOT BEEN UTILIZED FOR THE PURPOSE OF MAKING INVESTM ENTS. OWN FUNDS WHICH COMPRISING OF THE SHARE CAPITAL PLUS POST TAX CASH PROFITS TILL DATE MORE THAN INVESTMENTS. THE VALUE OF SHARE CAPITAL DURING THE YEAR UNDER CONSIDERATION IS ITSELF RS.256.98 CRORES AS AGAINST INVESTMENT OF RS .157.72 CRORES WHICH EVIDENTLY SHOWS THAT THE COMPANY HAS MADE INVESTMEN TS OUT OF ITS OWN FUNDS. IN ALL THE EARLIER ASSESSMENT YEARS, THE CIT(A) AND UPTO A.Y. 1996-97, THE HONBLE ITAT HAS DELETED THE DISALLOWANCE MADE BY T HE A.O. OF THE INTEREST EXPENSES AND ALLOWED THE DEDUCTION U/S. 80M ON GROS S DIVIDEND BASIS. THE MANNER OF INVESTMENTS IS A BUSINESS DECISION AND SH OULD NOT BE QUESTIONED IN ABSENCE OF ANY MATERIAL TO THE CONTRARY. THE INVES TMENTS HAVE BEEN MADE OUT OF OWN FUNDS, NO EXPENSES HAVE BEEN INCURRED TO EARN THE INCOME WHICH IS NOT INCLUDIBLE IN THE TOTAL INCOME OF THE APPELL ANT. THE HONBLE CIT(A) HAD DELETED THE DISALLOWANCE U/S. 14A OF THE ACT AND H AD DECIDED IN FAVOUR OF THE APPELLANT IN A.Y. 04-05 & 05-06. FROM THE OTHER SI DE, LD. D.R. RELIED UPON THE ORDERS OF THE AUTHORITIES BELOW AND REQUESTED TO CO NFIRM THE CIT(A) ORDER. 19. WE HAVE GONE THROUGH THE ORDER OF THE AUTHORITI ES BELOW AND HEARD THE ARGUMENTS. RULE 8D IS PROSPECTIVE AS HELD BY THE H ONBLE BOMBAY HIGH COURT IN CASE OF GODREJ AND BOYCE MFG. CO. LTD. VS. DCIT, (2010) 328 ITR 81, THE COURT HAS HELD THAT RULE 8D IS NOT RETROSPECTIV E AND APPLIES FROM A.Y. 08- ITA NOS. 624, 2213 & 2150 AHD OF 09 & C.O. NO. 54 AHD OF 09 PAGE 26 09. THE INVESTMENT IN QUESTION HAS NOT BEEN CHANGE D DURING THE YEAR. THE A.O. HAS NOT BROUGHT ON RECORD ANY MATERIAL / EVIDE NCE WHICH SHOWS THAT THE INVESTMENT POSITION HAS BEEN CHANGED IN CASE OF APP ELLANT DURING THE YEAR FROM A.Y. 97-98, WHEN DURING THE YEAR NO INVESTMENT HAS BEEN MADE BY THE APPELLANT AND SIMILAR ADDITIONS IN ITA NOS. 4215 & 4378/AHD/2007 FOR A.Y. 04- 05 HAD BEEN ALLOWED BY THE CO-ORDINATE BENCH IN A.Y . 04-05. THEREFORE, BY FOLLOWING THE ORDER OF THE CO-ORDINATE BENCH, WE AL LOW THE APPEAL OF THE ASSESSEE. 20. IN THE RESULT, ASSESSEES APPEAL FOR A.Y. 06-07 IS ALLOWED. ITA NO. 2213/AHD/2009 (A.Y. 06-07) 21. THE EFFECTIVE GROUNDS OF REVENUES APPEAL FOR A .Y. 06-07 ARE AS UNDER: 1. THE LD.CIT(A) WAS NOT JUSTIFIED TO DIRECT THE A .O. TO MAKE COMPUTATION OF DISALLOWANCE OF UNDER RULE 8D OF THE I.T. RULES, 1962. 2. THE LD.CIT(A) WAS NOT JUSTIFIED IN DELETING THE ADDITION OF RS.12,56,58,640/- MADE ON ACCOUNT OF LONG TERM CAPI TAL LOSSES. 22. THE FIRST GROUND HAS BEEN DISCUSSED IN ASSESSEE S APPEAL FOR A.Y. 06- 07 IN ITA NO. 2150/AHD/2009. THEREFORE, REVENUES APPEAL IS DISMISSED ON THE BASIS OF FINDINGS GIVEN IN ABOVE ASSESSEES APP EAL. 23. GROUND NO.2 IS AGAINST DELETING THE ADDITION OF RS.12,56,58,640/- MADE ON ACCOUNT OF LONG TERM CAPITAL LOSSES. THE FACTUR AL MATRIX OF THE CASE IS THAT THE APPELLANT HAD SHOWN LONG TERM CAPITAL LOSS FROM SALE OF SHARES AT RS.12,56,58,640/- FOR WHICH LD. A.O. HAD GIVEN REAS ONABLE OPPORTUNITY OF ITA NOS. 624, 2213 & 2150 AHD OF 09 & C.O. NO. 54 AHD OF 09 PAGE 27 BEING HEARD TO EXPLAIN AND FURNISHED THE DETAILS TH EREOF. THE APPELLANT HAD NOT PAID STT ON THIS TRANSACTION. AS PER DETAIL SU BMITTED BY THE APPELLANT, THE SALES OF THE COMPANY, ESSAR STEEL LTD., GUJARAT SET CO CLUTCH LTD., GRACE PAPER LTD. & TORRENT GUJARAT BIO TECH, THE APPELLAN T HAD SOLD SHARES OFF MARKET. THE LD. A.O. OBSERVED THAT THE APPELLANT U SED AS A MEANS OF TAX AVOIDANCE BY CLAIMING LOSS AND CARRYING IT FORWARD TO THE SUBSEQUENT YEARS TO SET OFF AGAINST THE INCOME OF THE SUBSEQUENT YEARS, THE CLAIM OF THE APPELLANT OF TREATING SUCH LOSS ARISING OUT OF A GENUINE TRAN SFER IS NOT ALLOWABLE. HE ALSO FOUND THAT ANOTHER SHARE OF RS.32,20,63,312/- WAS S OLD THROUGH STOCK MARKET ON WHICH STT WAS PAID AND CLAIMED EXEMPTION U/S.10( 38) OF THE IT ACT. THEREFORE, THE LONG TERM CAPITAL LOSS OF RS.12,56,5 8,640/- WAS NOT ALLOWED TO CARRY FORWARDED TO THE SUBSEQUENT YEAR. 24. THE ASSESSEE CARRIED THE MATTER BEFORE CIT(A) W HO HAS ALLOWED THE APPEAL BY OBSERVING AS UNDER: 3.3 THE MATTER HAS BEEN GIVEN DUE CONSIDERATION. THE ISSUE OF WHETHER THE TRANSACTIONS DONE OFF MARKET WOULD TA NTAMOUNT TO VALID TRANSACTIONS AND WHETHER THE ASSESSEE WOULD BE ENTI TLED FOR LONG TERM CAPITRAL LOSS IN THE FACE OF HAVING NOT PAID S .T.T. STANDS ALREADY DISCUSSED IN DETAIL FOR ASSESSMENT YEAR 2005-06 BY THE UNDERSIGNED. AS STATED THEREIN, I DO NOT THINK AN ASSESSEE IS PRECLUDED FROM DOING AN OFF MARKET TRANSACTION AN D IF S.T.T. HAS NOT BEEN PAID AS A CONSEQUENCE, EXEMPTION U/S. 10(3 8) WILL NOT BE AVAILABLE AND HENCE IT WILL BE COVERED UNDER THE NO RMAL PROVISIONS OF SECTION 45. THE FACT THAT THERE HAS BEEN A TRANSFE R STANDS DULY RECOGNIZED BY THE COMPANIES, WHOSE SHARES THE ASSES SEE HELD, AND THERE IS NOTHING ON RECORD THAT ANY STATUTORY OR RE GULATORY AUTHORITIES ITA NOS. 624, 2213 & 2150 AHD OF 09 & C.O. NO. 54 AHD OF 09 PAGE 28 OBJECTED TO THIS TRANSFER IN RESPECT OF THE MODE OF TRANSACTIONS, AFTER HAVING BEEN CONVEYED TO THEM. MERELY BECAUSE THE A PPELLANTS MANNER OF CONDUCTING TRANSACTION HAS LED TO A SITUA TION WHERE IT CAN MAKE A CLAIM OF CAPITAL LOSS WHICH IS JUSTIFIABLE A S PER THE PROVISIONS OF THE ACT, CANNOT LEAD TO THE ALLEGATION THAT APPE LLANT HAS ENTERED INTO AN ARRANGEMENT TO AVOID THE TAXES PAYABLE. TH IS WILL BE MORE SO WHEN WE ARE DEALING IN A COMPANY WHICH IS 100% O WNED BY THE STATE GOVERNMENT. AS STATE IN PRECEDING YEAR, IN S PIRIT S.T.T. IS ONLY A WAY OF COLLECTION OF TAX AT SOURCE AS FAR AS CAPI TAL GAINS IS CONCERNED. THE ACTUAL TAXABILITY OF CAPITAL GAINS AND ITS QUANTUM, OTHERWISE, HAS TO BE DETERMINED BY THE SUBSTANTIVE PROVISIONS OF THE INCOME-TAX ACT. IN ANY CASE, THE APPELLANT HAS ALS O BEEN FURTHER ABLE TO PROVE ITS BONA-FIDE AS THE SHARES HAVE BEEN TRANSACTED TO CO-PROMOTER GROUPS OF THE COMPANIES, THE APPELLANT BEING A STATE GOVERNMENT COMPANY INCORPORATED IN INDUSTRIAL DEVEL OPMENT. 3.3.1 HENCE, CONSIDERING ALL THE FACTS AND CIRCUMST ANCES OF THE CASE, I HOLD THAT THE ASSESSEE IS WELL ENTITLED TO CLAIM CAPITAL LOSS ON THE TRANSFER OF SHARES IN QUESTION. SINCE THERE HA S BEEN NO OBJECTION TO THE METHOD OF COMPUTATION OF THE LOSS AND THE VALUE, I DIRECT THE ASSESSING OFFICER TO ALLOW THE LOSS OF R S.12,56,58,640/-. 25. NOW THE REVENUE IS BEFORE US. SIMILAR ARGUMENTS , AS GIVEN IN REVENUES APPEAL FOR A.Y. 05-06 IN ITA NO. 624/AHD/ 2009 BY BOTH THE PARTIES. 26. WE HAVE GONE THROUGH THE ORDERS OF THE AUTHORIT IES BELOW AND FACTS OF THE CASE. OUR FINDINGS ARE ALSO SIMILAR AS TO ITA NO. 624/AHD/2009. THEREFORE, THE REVENUES APPEAL ON THIS GROUND IS A LSO DISMISSED. 27. IN THE RESULT, THE REVENUES APPEAL IS DISMISS ED. ITA NOS. 624, 2213 & 2150 AHD OF 09 & C.O. NO. 54 AHD OF 09 PAGE 29 28. IN THE COMBINED RESULT, THE REVENUES APPEALS I N BOTH ASSESSMENT YEARS AND ASSESSEES C.O. ARE DISMISSED AND THE ASS ESSEES APPEAL IN A.Y. 06-07 IS ALLOWED. THESE ORDERS PRONOUNCED IN OPEN COURT ON 12.10.2012 SD/- SD/- (G.C.GUPTA) (T.R. MEENA) VICE PRESIDENT ACCOUNTANT MEMBER TRUE COPY S.K.SINHA / COPY OF ORDER FORWARDED TO:- 1. '#$ / APPELLANT 2. &'#$ / RESPONDENT 3. )*)+ ' ', / CONCERNED CIT 4. ' ',- ' / CIT (A) 5. 01'' +, ' ''' +, 34 * / DR, ITAT, AHMEDABAD 6. 167 89 / GUARD FILE. BY ORDER/ , :/3' )' ' ''' +, 34 * < STRENGTHEN PREPARATION & DELIVERY OF ORDERS IN THE ITAT 1) DATE OF TAKING DICTATION 25.09.2012 & 04.10.2012 2) DIRECT DICTATION BY MEMBER STRAIGHT ON COMPUTER/LAPTOP/DRAGON DICTATE XXX 3) DATE OF TYPING & DRAFT ORDER PLACE BEFORE MEMBER 08.10.2012 4) DATE OF CORRECTION ,, ,, 5) DATE OF FURTHER CORRECTION XXX 6) DATE OF INITIAL SIGN BY MEMBERS 12.10.2012 7) ORDER UPLOADED ON ,, ,, 8) ORIGINAL DICTATION PAD HAS BEEN ENCLOSED IN THIS FILE YES 9) FINAL ORDER AND 2 ND COPY SEND TO BENCH CLERK ON 12.10.2012