SAGA CHEMICALS P.LTD, MUMBAI V. DCIT 11(1)(2), MUMBAI

ITA 104/MUM/2015

• Counselvise Citation: [2017] 126 COUNSELVISE.COM (IT) 8077 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 11 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 15-12-2017
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: E
• Assessment Year: 2011-2012
• Appeal Filed On: 07-01-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Share purchase agreement; Opportunity of being heard
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH I MUMBAI BEFORE SHRI MAHAVIR SINGH (JUDICIAL MEMBER) AND SHRI N.K. PRADHAN (ACCOUNTANT MEMBER) ITA NO. 104/MUM/2015 ASSESSMENT YEAR: 2011 - 12 SAGA CHEMICALS PVT. LTD. 107/108, ANAND ESTATE, N.M. JOSHI MARG, CHINCHPOKLI (W), MUMBAI - 400011 VS. DCIT - 11(1)(2) AAYAKAR BHAVAN, M.K. ROAD, MUMBAI - 400020. PAN NO. AAACS6839C APPELLANT RESPONDENT ITA NO. 534/MUM/2015 ASSESSMENT YEAR: 2011 - 12 SHREE RIDDHI CHEMICALS PVT. LTD. 1 ST FLOOR, HORNBY VIEW BUILDING, 12 RUSTOM SIDHWA MARG, FORT, MUMBAI - 400001 VS. DCIT - 11(2)(1) AAYAKAR BHAVAN, MUMBAI - 400020. PAN NO. AA DCS0750K APPELLANT RESPONDENT ITA NO. 6899/MUM/2014 ASSESSMENT YEAR: 2011 - 12 M.N. RAJKUMAR GARMENTS PVT. LTD. 12, HORNBY VIEW BUILDING, RUSTOM SIDHWA MARG, FORT, MUMBAI - 400001 VS. DCIT - 8(2) PRATYAKSH KAR BHAVAN, BKC (E), MUMBAI - 400051. PAN NO. AABCM0850E APPELLANT RESPONDENT ASSESSEE BY : MR. DHARMESH SHAH, AR REVENUE BY : MR. SAURABH KUMAR RAI, DR SAGA CHEMICALS, SHREE RIDDHI CHEMICALS & RAJKUMAR GARMENTS ITA NO. 104, 534/MUM/2015 & 6899/MUM/2014 2 DATE OF HEARING : 21/09/2017 DATE OF PRONOUNCEMENT : 15/12/2017 ORDER PER N.K. PRADHAN, A.M. THE CAPTIONED APPEALS FILED BY THE ASSESSEE ARE DIRECTED AGAINST THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS) - 17/ 18, MUMBAI AND ARISE OUT OF THE ASSESSMENT COMPLETED U/S 143(3) OF THE INCOME TAX ACT 1961 (THE ACT). AS COMMON ISSUES ARE INVOLVED, WE ARE PROCE EDING TO DISPOSE THEM OFF THROUGH A CONSOLIDATED ORDER FOR THE SAKE OF CONVENIENCE. 2. FACTS BEING SIMILAR, WE DISCUSS THE CASE OF M/S SAGA CHEMICALS PVT. LTD. BRIEFLY STATED, THE FACTS ARE THAT THE ASSESSEE - COMPANY HAS DECLARED CAPITAL GAINS OF RS.16,58,55,133/ - IN ITS RETURN OF INCOME FOR THE AY 2011 - 12 WHICH IS INCLUSIVE OF SHORT TERM CAP ITAL LOSS (STCL) OF RS.48,20,762/ - AND LONG TERM CAPITAL GAINS (LTCG) OF RS.17,06,75,895/ - . THE STCL OF RS.48,20,762/ - IS MAINLY ON ACCOUNT OF SALE OF SHARES OF PRUDENTIAL ICICI SERVICE INDUSTRY FUND - DIVIDEND - REINVESTMENT (RS.9,28,799/ - ) AND F OUR M PROPACK (RS.38,04,600/ - ). THIS STCL HAS BEEN SET OFF AGAINST THE LTCG OF RS.17,06,75,895/ - . THE ASSESSING OFFICER (AO) HELD THAT THE TRANSACTION OF SALE OF 1020 SHARES OF FOUR M PROPACK AT A PRICE OF RS.20/ - PER SHARE I S A SHAM TRANSACTION, THE PAPER WORK FOR WH ICH HAS BEEN ARRANGED IN ORDER TO LOWER THE TAX INCIDENCE ON THE OTHER TAXABLE CAPITAL GAINS TO THE EXTENT OF ALLEGED CAPITAL LOSS OF RS.38,04,600/ - . IT IS NOT EXPLAINED BY THE ASSESSEE AS TO HOW THE PRICE OR VALUE OF A SHARE OF FOUR M PROPACK FELL FROM SAGA CHEMICALS, SHREE RIDDHI CHEMICALS & RAJKUMAR GARMENTS ITA NO. 104, 534/MUM/2015 & 6899/MUM/2014 3 RS .3,750/ - AS ON 28.04.2010 TO RS.20/ - PER SHARE ON THE VERY NEXT DATE, VIZ. ON 29.04.2010. THE AO HELD THAT EVEN IF THE FUNDS HAVE MOVED THROUGH BANKING CHANNEL, AS THE ENTITIES CO NCERNED HAVE ARRANGED THE PAPER WORK, THE TRANSACTION CANNOT HELD AS GENUINE . THUS THE AO DISALLOWED THE ALLEGED STCL OF RS.38,04,600/ - ON SALE OF SHARES OF FOUR M PROPACK P. LTD. 3 . AGGRIEVED BY THE ORDER OF THE AO, THE ASSESSEE FILED AN APPEAL BEFORE THE LD. CIT(A). THE LD. CIT(A) HAS FOLLOWED THE ORDER DATED 15.09.2014 OF CIT(A) - 17, MUMBAI IN THE CASE OF M/S M.N. RAJKUMAR GARMENTS PVT. LTD. AND HELD THAT THE ASSESSEE HAD CREATED A FICTITIOUS STCL TO SET OFF AGAINST STCG TO AVOID PAYMENT OF TAXES BY USING DUBIOUS METHODS. THUS THE LD. CIT(A) UPHELD THE DISALLOWANCE OF RS.38,04,600 / - MADE BY THE AO AND DISMISSED THE APPEAL FILED BY THE ASSESSEE. 4 . BEFORE US, THE LD. COUNSEL OF THE ASSESSEE SUBMITS THAT THE SALE OF SHARES OF FOUR M PROPACK PVT. LTD. CANNOT BE INDEPENDENTLY CONSIDERED WITHOUT TAKING INTO ACCOUNT THE SALE OF SHARES O F GOLDEN CROSS PHARMA PVT. LTD. THE SALE OF SHARES OF FOUR M PROPACK PVT. LTD. AND GOLDEN CROSS PHARMA PVT. LTD. WERE PART OF THE COMMON DEAL WHEREBY THE ASSESSEE WAS OFFERED COMMON CONSIDERATION AMOUNT FOR THE SHARES OF BOTH THESE COMPANIES. THE SAID COMM ON CONSIDERATION WAS THEREAFTER ALLOCATED BETWEEN THE VARIOUS SHARES SOLD. HENCE, IF THE SALE CONSIDERATION IS MODIFIED, THE BALANCE CONSIDERATION, BEING THE SALE CONSIDERATION OF GOLD CROSS PHARMA PVT. LTD. SHARES WOULD STAND REDUCED TO THAT EXTENT. THE LD. COUNSEL ALSO SUBMITS THAT WHILE THE SALE OF THE SHARES WAS DEFINITE, THE CIRCUMSTANCES UNDER WHICH THE SHARES HAD TO BE SOLD AND SAGA CHEMICALS, SHREE RIDDHI CHEMICALS & RAJKUMAR GARMENTS ITA NO. 104, 534/MUM/2015 & 6899/MUM/2014 4 THE CONDITIONS UNDER WHICH THE ENTIRE COMPANY WAS TO BE HANDED OVER TO THE PURCHASER WERE SUCH THAT IT WAS INEVITABLE F OR THE ASSESSEE TO PUR CHASE THE SHARES AT HIGH PRICE. IT IS ALSO SUBMITTED THAT THE SALE OF SHARES WAS ONLY SUBJECT TO CERTAIN CONDITIONS PUT FORTH BY CIPLA LTD. WHO WAS ACQUIRING ALL THE COMPANIES IN A CONSOLIDATED PACKAGE. FOR THIS, THE ASSESSEE HAD BE EN GIVEN ATTRACTIVE CONSIDERATION WHICH COULD NOT HAVE BEEN REFUSED. IT IS ONLY BECAUSE THE ASSESSEE FULFILLED THE CONDITIONS, THE SHARES WERE LATER TRANSFERRED BY THE ASSESSEE T O GOLDEN CROSS PHARMA PVT. LTD. THE LD. COUNSEL FURTHER SUBMITS THAT THE BAL ANCE SHEET FOR THE EARLIER YEARS OF FOUR M PROPACK PVT. LTD. SHOWS THAT IT WAS A LOSS MAKING COMPANY AND THE ASSESSEE ALONG WITH OTHER C ONCERNS WERE HOLDING 100% SHARE HOLDING OF THE COMPANY. SINCE THE COMPANY HAD SUBSTANTIAL LOSS TO THE TUNE OF RS.2.65 CRO RES AS ON 31.03.2010 , THE ASSESSEE HAD NO OPTION BUT TO CLOSE THE COMPANY AND WIND UP. THE ASSESSEE - COMPANY RECEIVED A PROPOSAL FOR PURCHASE OF SHARES OF GOLDEN CROSS PHARMA PVT. LTD. BY ANOTHER COMPANY I.E. M/S CIPLA LTD. THE COMPANY CIPLA LTD. WAS READY TO ACQUIRE THE SHARES OF GOLDEN CROSS PHARMA PVT. LTD. AND ALSO FOUR M PROPACK PVT. LTD. FROM THE ASSESSEE - COMPANY. ACCORDINGLY, IT WAS DECIDED THAT THE SHARES OF FOUR M PROPACK PVT. LTD. WOULD BE ACQUIRED BY GOLDEN CROSS PHARMA PVT. LTD. AND THAT CIPLA LT D. WOULD TAKE OVER THE SHARES OF GOLDEN CROSS PHARMA LTD. FOR AN AGGREGATE CONSIDERATION OF RS.7,06,87,700/ - . IN THE SAID MANNER, THE ASSESSEE - COMPANY WAS TO DIVEST ITS INVESTMENT TO CIPLA LTD. FOR THE AGGREGATE CONSIDERATION WHICH WOULD HAVE YIELDED PROFI T TO IT. HOWEVER, ONE OF THE SAGA CHEMICALS, SHREE RIDDHI CHEMICALS & RAJKUMAR GARMENTS ITA NO. 104, 534/MUM/2015 & 6899/MUM/2014 5 CONDITIONS LAID DOWN BY CIPLA LTD. WAS THAT THEY WOULD NOT PREFER TO ACQUIRE ANY LOSS MAKING COMPANY AND THAT ONLY IF THE ASSESSEE AND ITS SISTER CONCERNS WERE READY TO ABSORB THE LOSSES, THEY WOULD TAKE OVER THE COMPANY FOUR M PROPACK PVT. LTD. UNDER THE CONSOLIDATED DEAL. SIMILARLY, THEY ALSO PREFERRED TO REDUCE THE LOANS LIABILITY ON THE SISTER CONCERNS IN THE BALANCE SHEET SO THAT THE C OMPANYS NET WORTH STANDS IMPROVED AND CONVERTED FROM NEGATIVE NET WORTH TO POSITIVE NET W ORTH. AS SUCH, THEY ONLY PREFERRED TO TAKE THE COMPANY, FOUR M PROPACK PVT. LTD., IF IT DID NOT HAVE NEGATIVE NET WORTH. UNDER THESE NEGOTIATED DEAL, THE ASSESSEE AGREED TO TRANSFER THE SHARES OF FOUR M PROPACK PVT. LTD. IN THE NAME OF GOLDEN CROSS PHARMA PVT. LTD. SO THAT THE SHARES OF GOLDEN CROSS PHARMA PVT. LTD. COULD BE TRANSFERRED TO CIPLA LTD. AND THAT THESE I NV ESTMENTS COULD BE DISPOSED OFF. THUS IT IS SUBMITTED BY THE LD. COUNSEL THAT IT WAS WITH INTENTION TO ENSURE A NON - NEGATIVE NET WORTH COMPAN Y AND TO COMPLY WITH THE CONDITIONS LAID DOWN BY THE BUYER, THE ASSESSEE - COMPANY PARTIALLY CONVERTED ITS LOANS GIVEN TO THE SAID FOUR M PROPACK PVT. LTD. INTO EQUITY SHARES TO THE EXTENT PERMITTED BY THE AUTHORIZED CAPITAL IN SUCH WAY THAT THE AMOUNT OF PR EMIUM FOR ISSUE OF NEW SHARES WOULD OFFSET THE LOSS SUFFERED BY THE COMPANY. AS SUCH, WITH THE ISSUE OF SHARES AT A HIGH PREMIUM, THE COMPANY MANAGED TO OVERCOME THE IMPACT OF THE LOSSES ON THE NET WORTH OF THE COMPANY. IN SUCH A WAY, THE ASSESSEE AND ITS GROUP CONCERNS WERE ABLE TO OBVIATE THE CRITICAL CONDITIONS IMPOSED BY THE BUYER. AS A PRUDENT INVESTOR, THE ASSESSEE - COMPANY HAD INVESTED SOME MORE FUNDS IN THE SAID COMPANY IN ORDER TO FINALIZE THE DEAL PROVIDED BY THE BUYER. UNDER THESE CIRCUMSTANCES, THE LD. COUNSEL SAGA CHEMICALS, SHREE RIDDHI CHEMICALS & RAJKUMAR GARMENTS ITA NO. 104, 534/MUM/2015 & 6899/MUM/2014 6 STATES THAT THE ABOVE TRANSACTION CANNOT BE CONSIDERED TO BE A COLOURABLE DEVICE SINCE THE SAME WAS A PART OF THE DEAL ENTERED INTO BY THE ASSESSEE AND THE GROUP CONCERNS W ITH THE FINAL BUYER. THUS, THE LD. COUNSEL SUBMITS THAT THE DISALLOWANCE MADE BY THE AO AND THEN CONFIRMED BY THE LD. CIT(A) WITHOUT APPRECIATING THE FACTS OF THE PRESENT CASE IS INCORRECT AND UNJUSTIFIED. 5 . ON THE OTHER HAND, THE LD. DR SUBMITS THAT THE TRANSACTION OF SALE OF 1,020 SHARES OF FOUR M PROPACK PVT. LTD. AT A PRICE OF RS.20/ - PER SHARE IS A SHAM TRANSACTION DELIBERATELY MEANT TO LOWER THE TAX INCIDENCE D EVISED TO MAKE A CAPITAL LOSS OF RS.38,04,600/ - . IT IS STATED BY HIM THAT THE LD. CIT(A) H AS RIGHTLY CONFIRMED THE DISALLOWANCE OF RS.38,04,600/ - MADE BY THE AO ON THE SO CALLED STCL. THE LD. DR THUS SUPPORTS THE ORDER PASSED BY THE LD. CIT(A). 6. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIALS ON RECORD. WE FIND THAT TH E LD. AR OF THE ASSESSEE HAS FILED BEFORE THE TRIBUNAL A PAPER BOOK (P/B) CONTAINING INTER ALIA (I) CONFIRMATION FROM CIPLA LTD. FOR ACQUISITION OF SHARES OF GOLDEN CROSS PHARMA PVT. LTD. DATED 11.06.2014, (II) CONFIRMATION FROM GOLDEN CROSS PHARMA PVT. LT D. FOR ACQUISITION OF SHARES OF FOUR M PROPACK PVT. LTD. DATED 18.06.2014 AND (III) COPY OF SHARE PURCHASE AGREEMENT DATED 10.05.2010 EXECUTED BETWEEN GOLDEN CROSS PHARMA PVT. LTD. AND CIPLA LTD. IT IS STATED BY THE LD. COUNSEL THAT THE ABOVE DOCUMENTS W ERE AVAILABLE BEFORE THE AO AND THE LD. CIT(A). SAGA CHEMICALS, SHREE RIDDHI CHEMICALS & RAJKUMAR GARMENTS ITA NO. 104, 534/MUM/2015 & 6899/MUM/2014 7 AT THIS JUNCTURE, W E REFER TO PAGE 9 OF THE ORDER DATED 11.12.2014 PASSED BY THE LD. CIT(A) AND FIND THAT THE ASSESSEE HAD SUBMITTED , DURING THE COURSE OF APPELLATE PROCEEDINGS BEFORE HIM THE FOLLOWING : THE OBSERVATIONS IN PARA 4(VIII) HAVE BEEN MADE BY THE ASSESSING OFFICER MERELY OUT OF HIS BELIEF WITHOUT AGAIN TAKING INTO ACCOUNT THE CONFIRMATION OF CIPLA LTD. WHICH EXPLAINS THE CIRCUMSTANCES UNDER WHICH THE SAID SHARES WERE ACQUIRED BY THE APPELLANT. IT IS THEREFORE SUBMITTED THAT THE CONCLUSION DRAWN BY THE ASSESSING OFFICER IN THE ENTIRE REMAND REPORT IS WITHO UT CONSIDER ING THE EVIDENCES FILED BY THE APPELLANT. I F THE ASSESSING OFFICER WAS NOT CONVINCED, HE COULD HAVE ENQUIRED WITH CIPLA LTD. AND GOL D EN CROSS PHARMA PVT. LTD. TO CONFIRM THE FACTS. WITHOUT ANY EVIDENCE ON RECORD, HE COULD NOT HAVE DOUBTED THE TRANSACTION AS NOT GENUINE. 6 .1 WE ARE OF THE CONSIDERED VIEW THAT THE CONTENTIOUS ISSUES IN THE INSTANT CASE COULD BE RESOLVED BY EXAMINING CIP LA LTD. AND GOLDEN CROSS PHARMA PVT. LTD. A PROPER HEARING MUST ALWAYS INCLUDE AN OPPORTUNITY TO THOSE WHO ARE PARTIES IN THE CONTROVERSY FOR CORRECTING OR CONTRADICTING ANYTHING PREJUDICIAL TO THEIR VIEW. THE HON'BLE SUPREME COURT IN STATE OF KERALA VS. K.T. SHADULI GROCERY DEALER AIR 1977 SC 1627 , RECOGNISED THE IMPORTANCE OF ORAL EVIDENCE BY HOLDING THAT THE OPPORTUNITY TO PROVE THE CORRECTNESS OR COMPLETENESS OF THE RETURN NECESSARILY CARRY WITH IT THE RIGHT TO EXAMINE WITNESSES AND THAT INCLUDES EQUALLY THE RIGHT TO CROSS - EXAMINE WITNESSES. TH E SAME HAS BEEN REITERATED IN ITO V S. M. PIRAI CHOODI (2012) 20 TAXMANN.COM 733 (SC) . WE, THEREFORE, SET ASIDE THE ORDER OF THE LD. CIT(A) AND RESTORE THE MATTER TO THE FILE OF THE AO TO MAKE AN ASSESSMENT DE NOVO BY SAGA CHEMICALS, SHREE RIDDHI CHEMICALS & RAJKUMAR GARMENTS ITA NO. 104, 534/MUM/2015 & 6899/MUM/2014 8 EXAMINING THE ABOVE CONCERNS AND GIVI NG AN OPPORTUNITY TO THE ASSESSEE TO CROSS - EXAMINE THEM. WE DIRECT THE ASSESSEE TO FILE THE RELEVANT DOCUMENTS/EVIDENCE BEFORE THE AO. NEEDLESS TO SAY THE AO WOULD GIVE REASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE BEFORE FINALIZING THE ASSESSMENT ORDER. AS WE HAVE SET ASIDE THE CASE, WE ARE NOT ADVERTING TO THE CASE LAWS RELIED ON BY THE LD. COUNSELS. 7 . FACTS BEING SIMILAR, OUR DECISION IN THE CASE OF M/S SAGA CHEMICALS PVT. LTD. APPLIES MUTATIS MUTANDIS TO THE CASE OF SHREE RIDDHI CHEMICALS AN D M.N. RAJKUMAR GARMENTS PVT. LTD. 8 . IN THE RESULT, THE APPEALS ARE ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 15/12/2017. SD/ - SD/ - (MAHAVIR SINGH) (N.K. PRADHAN) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI ; DATED: 15/12/2017 RAHUL SHARMA, SR. P.S. COPY OF THE ORDER FORWARDED TO : 1. THE APPELLANT 2. THE RESPONDENT. 3. THE CIT(A) - 4. CIT 5. DR, ITAT, MUMBAI 6. GUARD FILE . BY ORDER, //TRUE COPY// (DY./ASSTT. REGISTRAR) ITAT, MUMBAI