Suraj Limited, Ahmedabad V. The ACIT.,(OSD)Circle-8, Ahmedabad

ITA 1632/AHD/2012

• Counselvise Citation: [2017] 130 COUNSELVISE.COM (IT) 9553 (ITAT-AHMEDABAD)
• Duration Of Justice: 4 year(s) 5 month(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-01-2017
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 05-12-2016
• Assessment Year: 2009-2010
• Appeal Filed On: 27-07-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: G C PIPARA
• Keywords: Capital asset; Gift; Share purchase agreement; Deemed to accrue or arise in india; Fair market value; Avoidance of tax; Scheme of amalgamation; Sham transactions
• Section: 143(3); 43(5)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD A BENCH AHMEDABAD BEFORE SHRI R.P. TOLANI, JM & SHRI MANISH BORAD, AM. ITA NO. 1632/AHD/2012 ASST. YEAR: 2009-10 SURAJ LIMITED, SURAT HOUSE OPP. USMANPURA GARDEN, USMANPURA, AHMEDABAD. VS. ACIT (OSD), CIRCLE-8, AHMEDABAD. APPELLANT RESPONDENT PAN AAICS 9693L APPELLANT BY SHRI G. C. PIPARA, AR RESPONDENT BY SHRI K. MADHUSUDAN, SR.DR DATE OF HEARING: 05/12/2016 DATE OF PRONOUNCEMENT: 09/01/2017 O R D E R PER MANISH BORAD, ACCOUNTANT MEMBER . THIS APPEAL BY THE ASSESSEE FOR ASST. YEAR 2009-10 IS DIRECTED AGAINST THE ORDER OF LD. CIT(A)-XIV, AHMEDABAD, DAT ED 02/05/2012 ARISING OUT OF ORDER U/S 143(3) OF THE IT ACT, 1961 (IN SHORT THE ACT) FRAMED ON 17/11/2011 BY ACIT(OSD), CIRCLE-8, AHMED ABAD. 2. BRIEFLY STATED FACTS ARE THAT ASSESSEE IS A LIMI TED COMPANY. RETURN OF INCOME DECLARING LOSS OF RS.1,23,79,101/- WAS FILED ON 25.09.2009. CASE WAS SELECTED FOR SCRUTINY ASSESSME NT. NECESSARY INFORMATION WERE CALLED FOR. REVISED COMPUTATION OF INCOME WAS ALSO ITA NO. 1632/AHD/2012 ASST. YEAR 2009-10 2 FILED DURING THE COURSE OF ASSESSMENT PROCEEDINGS. SHORT TERM CAPITAL LOSS OF RS.1,75,50,000/- WAS CONSIDERED AS SHAM TRA NSACTION BY LD. ASSESSING OFFICER AND WAS NOT ALLOWED TO BE SET OFF AGAINST THE INCOME. LD. ASSESSING OFFICER ALSO DISALLOWED INTER EST EXPENSES OF RS.9,18,134/- AND RENT EXPENSES OF RS.9,00,000/- FO R MUMBAI OFFICE. ACCORDINGLY INCOME WAS ASSESSED AT RS.2,97,13,750/- . 3. AGGRIEVED, ASSESSEE WENT IN APPEAL BEFORE LD. CI T(A) BUT COULD NOT SUCCEED. 4. NOW ASSESSEE IS IN APPEAL BEFORE THE TRIBUNAL RA ISING FOLLOWING GROUNDS :- 1) THE ORDER OF THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) IS ERRONEOUS AND BAD IN LAW AND ON THE FACTS OF THE CA SE. 2) THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) HAS WRONGLY DISALLOWED SHORT TERM CAPITAL LOSS OF RS. 1,75,50,0 00/- CONSIDERING THE SAME AS SHARN TRANSACTIGNS. 3 THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) HAS NOT ALLOWED INTEREST EXPENSE OF RS. 9,18,134/- AS AGAINST INTER EST FREE ADVANCE TO GROUP COMPANY. 4) THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) HAS NOT CONSIDERED RENT EXP OF MUMBAI OFFICE AS A BUSINESS EXPENSE. 5) THE APPELLANT GRAVES TO ADD, ALTER OR MOD IFY THE AFORESAID GROUNDS. 5. GROUND NO.1 IS GENERAL IN NATURE WHICH NEEDS NO ADJUDICATION. 6. AS REGARDS GROUND NO.2 LD. AR SUBMITTED THAT DUR ING THE COURSE OF ASSESSMENT PROCEEDINGS LD. ASSESSING OFFICER ENQ UIRED ABOUT THE SHORT-TERM CAPITAL LOSS OF RS.1,75,50,000/- WHEREIN IT WAS SUBMITTED ITA NO. 1632/AHD/2012 ASST. YEAR 2009-10 3 THAT PURCHASES OF 15,000 EQUITY SHARES EACH FROM SU RAT COMMODITY PVT. LTD., SURAT RETAIL PVT. LTD. AND FROM SURAJ ST AR TRADING PVT. LTD. WERE MADE ON 22.2.2008 AT THE PURCHASE PRICE OF RS. 60,00,000/- EACH WHICH TOTALED TO RS.1,80,00,000/-. ON 23.12.20 08 15,000 SHARES EACH OF THESE THREE COMPANIES WERE SOLD AT THE FACE VALUE OF RS.10/- PER SHARE AND TOTAL CONSIDERATION OF RS.4,50,000/- WAS RECEIVED WHICH GAVE RISE TO SHORT TERM CAPITAL LOSS OF RS.1, 75,50,000/-. LD. AR FURTHER SUBMITTED THAT ALL THESE TRANSACTIONS WERE EXECUTED OFF MARKET AND NOT THROUGH RECOGNIZED STOCK EXCHANGE. HOWEVER, PROPER DOCUMENTATION RELATING TO THEIR TRANSFER MO DE OF PAYMENT AND COPY OF BANK STATEMENT WERE PLACED ON RECORD. BUT L D. ASSESSING OFFICER WAS OF THE VIEW THAT THE SHORT TERM CAPITAL LOSS HAS ARISEN FROM THE TRANSACTIONS WITH RELATED PARTIES U/S 40A(2)(B) OF THE ACT AND THESE TRANSACTIONS ARE SHAM AS THE ASSESSEE HAS A DOPTED COLOURABLE DEVICE FOR SETTING OFF LONG TERM CAPITAL GAIN BY THE IMPUGNED SHORT TERM CAPITAL LOSS. WHEN THE MATTER C AME BEFORE LD. CIT(A) THE VIEW TAKEN BY LD. ASSESSING OFFICER WAS CONFIRMED BY HIM BY OBSERVING AS FOLLOWS :- DECISION: I HAVE CAREFULLY PERUSED THE ASSESSMENT ORDER AND T HE SUBMISSIONS GIVEN BY THE APPELLANT. THE FACTS SHOW THAT THE APPELLANT COMPAN Y HAD PURCHASED SHARES OF THE GROUP COMPANIES AT A PREMIUM AND SOLD THE SAME SHARES WITHIN AN INTERVAL OF LESS THAN ONE YEAR TO ITS DIRECTOR AT A CONSIDER ABLY LOWER PRICE THEREBY RESULTING IN LOSS OF RS. 1,75,50,000/-, FOR THE SAKE OF CLARI TY, THE DETAILS OF SALE AND PURCHASE OF SHARES ARE AS UNDER: SL. NO. NAME OF COMPANY WHOSE SHARES WERE SOLD , NO. OL SHARES DOTE OF PURCHASE BY ME COMPANY PURCHASE PRICE DATE OF SALE TO PERSONS SPECIFIED SALE PRICE TOSS ITA NO. 1632/AHD/2012 ASST. YEAR 2009-10 4 1, SURAJ COMMODITY PVT LTD 15000 22/02/08 6000000 23/12/03 150000 5850000 2. SURAJ RETAIL PVT. LTD 15000 22/02/08 6000000 23/12/08 150000 5850000 3; SURAJ STAR TRACING PVT. LTD 15000 22/02/03 6000000 23/12/08 150000 5850000 THE ABOVE LOSS HAS BEEN TREATED AS SHAM BY THE A. O . AND THE CLAIM OF SHORT TERM CAPITAL LOSS HAS BEEN DISALLOWED. HE HAS ALTER NATIVELY TREATED THE TRANSACTION AS SPECULATIVE IN NATURE. THE APPELLANT HAS SUBMITTED THAT THE PAYMENTS HAVE BEEN MADE THROUGH CHEQUE AND ALSO REC EIVED THROUGH CHEQUE AT THE TIME OF PURCHASE AND SALE. ALL THE TRANSACTIONS ARE ACCOUNTED TOR IN THE BOOKS OF ACCOUNT AND, THEREFORE, THE TRANSACTION SHOULD N OT BE TREATED AS SHAM AND CLAIM SHOULD BE ALLOWED. AN EXAMINATION OF THE FACTS SHOW THP4 THE APPELLAN T HAS PURCHASED THE SHARES AT A PREMIUM OF RS.30 FOR A FACE VALUE OF RS.10/- P ER SHARE. THE SHARES WERE PURCHASED ON 22/02/2008 AND WERE SOLD AT FACE VALUE OF RS.10 ON 23/12/2008. THE COMPANIES WHOSE SHARES HAVE BEEN PURCHASED AND SOLD ARE GROUP COMPANIES INVOLVED IN SIMILAR LINE OF BUSINESS. IT IS OBSERVED FROM THE BALANCE SHEETS OF THE THREE GROUP COMPANIES AS ON 31/03/200 9 WHOSE SHARES HAVE BEEN PURCHASED AND SOLD THAT THE INCOME OF THESE COMPANI ES ARE FROM INTEREST. THE DETAILS OF INCOME SHOWN BY THESE COMPANIES FOR FINA NCIAL YEAR 2007-08 & 7008- 09 ARE .AS UNDER; S. NO. NAME OF COMPANY WHOSE SHARES WERE SOLD INCOME F.Y, 2008-09 INCOME F.Y. 2007-08 1. SURAJ COMMODITY PVT. LTD 31045 6782 2, SURAJ RETAIL PVT. LTD 31045 6782 3, SURO| STAR TRADING PVT, LTD 30745 6782 THE ABOVE FACTS SHOW THAT THE INTEREST INCOME SHOWN BY THE GROUP COMPANIES WAS LESS IN EARLIER YEAR I.E. THE YEAR IN WHICH THE SHARES WERE ISSUED ON PREMIUM, IT HAS INCREASED MARGINALLY IN THE CURRENT A. Y. HOWEVER, THERE IS NO MAJOR CHANGE IN OTHER BUSINESS OR ANY PLAN WHICH IS APPARENT FROM THE BALANCE SHEETS OR THE AUDIT REPORT OF THE COMPANY. THEREFOR E, THE FACTORS LEADING TO THE DECISION FOR PURCHASING THE SHARES AT A PREMIUM AND SALE OF SHARES TO DIRECTORS ARE SAME AND THERE IS NO CHANGE IN THE AFFAIRS OF T HE COMPANIES WHOSE SHARES HAVE BEEN PURCHASED / SOLD, THE DECISION TO SALE SH ARES IS, THEREFORE, WITHOUT ANY LOGIC AND IS APPARENTLY A COLORABLE METHOD TO R EDUCE THE TAX LIABILITY OF THE ITA NO. 1632/AHD/2012 ASST. YEAR 2009-10 5 APPELLANT COMPANY. THERE IS NO DOUBT THAT THE APPEL LANT HAS TRIED TO CREATE A SEMBLANCE OF GENUINENESS BY MAKING THE PAYMENTS BY CHEQUE ON THE DATE OF PURCHASE AND ALSO RECEIVING THE PAYMENT BY CHEQUE A T THE TIME OF SALE BUT THIS IS NOT GOING TO ALTER THE SPIRIT BEHIND THIS TRANSACTI ONS. THE APPELLANT'S CLAIM THAT IT WAS A TAX PLANNING IS CLEARLY NOT ADMISSIBLE AS THE SE TRANSACTIONS CLEARLY TAKE THE FORM OF COLORABLE DEVICE. THE SHARES WHICH WERE VAL UED AT RS.50, TEN (10) MONTHS BACK AND THERE IS NO CHANGE IN BUSINESS PATT ERN FOR FUTURE PROSPECTS OF THE COMPANY CANNOT BE SOLD AT RS.10 WITHOUT ANY SUP PORTING EVIDENCE TO SHOW THE REASONS FOR STEEP DOWNWARD VALUATION. IT IS CLE AR THAT THE DIRECTORS OF THE APPELLANT COMPANY ARE CONTROLLING THE OTHER GROUP C OMPANIES AND IT IS A DEVICE TO BOOK LOSS IN THE BOOKS OF THE APPELLANT COMPANY AND TRANSFER THE SHARES TO THE DIRECTORS. THE APPELLANT HAS HIMSELF ADMITTED THAT THIS LOSS HAS BEEN ADJUSTED AGAINST THE LONG TERM CAPITAL GAIN EARNED FROM THE SALE OF SHARES OF M/S. KAMLA MENTION PVT. LTD. IT CANNOT BE CONSIDERED AS A TAX PLANNING AS ALL THE CHARACTERISTIC OF THE TRANSACTIONS CLEARLY SHOW THA T THESE ARE THE MEASURES OF TAX AVOIDANCE. THE TRANSACTIONS HAD A MALA FIDE MOTIVE TO REDUCE TAX LIABILITY IN THE HANDS OF THE APPELLANT COMPANY. THERE IS NO BASIS O F VALUATION OF SHARES FOR TRANSFERRING THE SHARES TO THE DIRECTORS. THE TRANS ACTION IS NOT AT ARMS-LENGTH PRICE AND THE APPELLANT ALSO HAS NOT BEEN ABLE TO P ROVE THE JUSTIFICATION OF THE PRICE FIXED. THE SUBMISSION OF THE APPELLANT THAT THE SHARES WERE VALUED BY THE DIRECTORS CANNOT BE ACCEPTED. IT IS NOTED FROM THE ) WEBSITE OF THE BSE THAT THE COMPANY IS A LISTED COMPANY SINCE 2001 AND ACCORDI NGLY IT IS A PUBLIC LIMITED COMPANY. THE { APPELLANT HAS NOT BEEN ABLE JO PRODU CE ANY EVIDENCE TO SHOW \ THAT THE PROCEDURE PRESCRIBED BY SEBI OR OTHER REGU LATING AGENCIES HAVE BEEN FOLLOWED AT THE TIME OF PURCHASE AND SALE OF SHARE S. THESE FACTS ALSO CLEARLY PROVE THE MOTIVE OF THE APPELLANT. IN VIEW OF THE ABOVE FACTS, I AM IN COMPLETE AGREEM ENT WITH THE FINDINGS OF THE A, O. WHICH HAS BEEN GIVEN BY HIM ON PAGE 9 & 10 OF HI S ORDER. THE TRANSACTIONS ARE TREATED AS SHAM TRANSACTIONS AND THE SHORT TERM CAPITAL LOSS IS HELD TO BE DISALLOWABLE. BEFORE CONCLUDING THIS ISSUE, THE RECENT JUDGMENT O F HON'BLE BOMBAY HIGH COURT IN INCOME TAX APPEAL NO. 5538 OF 2010 IN THE CASE O F KILLICK NIXON LIMITED VS. DCIT IS WORTH MENTIONING. THE HON'BLE COURT HAS DEA LT WITH THE SIMILAR FACTS ANA* HAS HELD THAT THE TRANSACTIONS WERE SHAM. THE HON'B IE JUDGES HAVE CONSIDERED ALL THE LEADING JUDGMENTS OF THE HON'BI SUPREME CO URT ON ISSUE AND HAVE ANALYZED THE PRINCIPLE. IT WOULD BE APPROPRIATE TO QUOTE FROM THE JUDGMENT GIVEN BY HON'BIE JUDGES WHICH IS RELEVANT TO IHE ISSUE AN D REGARDING THE CLARITY BETWEEN TAX PLANNING AND FAX EVASION. THE RELEVANT EXTRACTS ARE ASUNDER: 14. SO FAR AS THE PRINCIPLE SAID DOWN IN THE MATTER OF OMAR SAFETY MONAMED SOFT (SUPRA) IS CONCERNED THERE CAN BE NO DISPUTE ABOUT THE PROPOSITION LAID DOWN THEREIN. HOWEVER WE HAVE NOT BEEN SHOWN HOW THE TRIBUNAL WAS IN BREACH OF THE SOME. WE FIND THAT THE TRIBUNAL HAS CONSIDERED THE EVIDENCE OF PURCHASE AND SALE OF SHARES TO BOOK LONG TERM AND SNORT TERM TOSSES AND TAKING ALL THE EVIDENCE TOGETHER INCLUDING THE SURROUNDING CIRCUMSTANCES REACHED A FINDING THAT THE PURCHASE AND SOLE OF SHAR ES IS NOT GENUINE. SO FAROS THE DECISION ITA NO. 1632/AHD/2012 ASST. YEAR 2009-10 6 OF /HE SUPREME COURT IN VODAFONE INTERNATIONAL (DATED 20 JANUARY 2012) IS CONCERNED, THE COURT CONSIDERED US DECISIONS IN THE MATTERS OF MC D OWETL REPORTED IN (1985) 3 SCC 230. AZADI BACHAO REPORTED IN (2004) 10 SCC I AND THE MATHURARN AGARWAL REPORTED IN (1999) 8 SCC 667 AND CONCLUDED THAT WHERE THE TRANSACTION IS N OT GENUINE BUT A COLOURABLE DEVICE THERE COULD BE NO QUESTION OF FAX PLANNING. THE SUPREME COURT IN THE AFORESAID CASE AFTER CONSIDERING THE AFORESAID T WO DECISIONS CONCLUDED AS FOLLOWS: 'THE MAJORITY JUDGMENT IN MC DOWELL HELD THAT 'FAX PLANNING MAY BE LEGITIMATE PROVIDED IT IS WITHIN THE FRAMEWORK OF LAW [ PARA 4 5]. IN THE TATTER PART OF PARA 45, IT HELD THAT 'CO LOURABLE DEVICE CANNOT BE A PART OF FAX PLANNING AND IT IS WRONG TO ENCOURAGE THE BELIEF THAT I T IS HONOURABLE TO AVOID PAYMENT OF FAX BY RESORTING TO DUBIOUS METHODS'. IT IS THE OBLIGATION OF EVERY CITIZEN TO PAY THE TAXES WITHOUT RESORTING TO SUBFERFUGES. THE ABOVE OBSERVATIONS SHOULD BE READ WITH PARA 46 WHERE THE MAJORITY HOLDS 'ON THIS ASPECT ONE OF US, CHINAPPA REDPY, J. HAS PROPOSED A SEPARATE OPINION WITH WHICH WE AGREE'.7HE WORDS 'THIS ASPECT' EXPRESS THE MAJORITY'S AGREEMENT WITH THE JUDGMENT OF REDDY, J, ONLY IN RELATION TO TAX EVASION THROUGH THE USE OF COLOURABLE DEVICES AND BY RESORTING TO DUBIOUS METHODS AND SUB TERFUGES. THUS, IT CANNOT BE SAID THAT ALL TAX PLANNING IS ILLEGAL/ILLEGITIMATE/IM PERMISSIBLE. MOREOVER, REDDY, J. HIMSELF SAYS THAT HE AGREES WITH THE MAJORITY, IN THE JUDGMENT OF REDDY, JI THERE ORE REPEATED REFERENCES TO SCHEMES AND DEVICES IN CONTRADISTINCTION TO 'LEGITI MATE AVOIDANCE OF TAX LIABILITY [PARAS 7-10, 17 AND 1 8]. IN OUR VIEW, ALTHOUGH CHINNAPPA REDDY, J* MAKES A NUMBER OF OBSERVATIONS REGARDING THE NEED TO DEPART FROM THE 'WESTRNINSFER' AND TAX AVOIDANCE- THESE ARE CLEARLY ONLY IN THE CONTEXT OF ARTIFICIAL AND CALOURABIE DEVICES. READING MC DOWELL, IN THE MONGER INDICATED HEREINABOVE, IN CASES OF TREATY SHOPPING AND/OR TAX AVOIDANCE, THERE IS NO CONFLICT BETWEEN MCDOWEFL AND AZADIBACH AO OR BETWEEN MC DOWEFT AND MAFHURA AGARWAF.' 15 THE AFORESAID OBSERVATIONS OF THE SUPREME COURT MAKES IT VERY CLEAR THAT A COLOURABLE DEVICE CANNOT BE A PARF OF TAX PLANNING, THEREFORE WHERE A TRANSACTION IS SHAM AND NOT GENUINE AS IN THE PRESENT CASE THEN IT CANNOT BE CONSIDERED TO BE A PARF OF TAX PLANNING OR LEGITIMATE AVOIDANCE OF TAX LIABILITY. THE SUPREME COURT IN FACT CONCLUDED THAT THERE IS NO CONFLICT BETWEEN ITS DECISIONS IN THE MATTER OF MC DOWELL (SUPRA), AZADI BACHAO (SUPRA) AND MATHURAM AGARWAL (SUPRA), IN THE PRESENT CASE THE PURCHASE AND SALE OF SHARES, SO AS TO TAKE LONG TERM AND SHORT T ERM CAPITAL LOSS WAS FOUND AS A MATTER OF FACT BY ALL THE T HREE AUTHORITIES TO BE A SHAM. THEREFORE AUTHORITIES CAME TO A FINDING THAT THE SAME WAS NOT GENUINE. SO FAR AS THE QUESTION NOS.(I I), (III) FIV} AND (V) ORE CONCERNED, WE HOLD THAT THESE- ARE PURE QUESTIONS OF FACTS AND AS THERE ARE CONCURRENT FINDING OF THE AUTHORITIES BELOW, NO QUESTION OF /AW ARISES FOR THIS COURT TO INTERFERE. IN VIEW OF ABOVE FACTS AND DISCUSSION, THE GROUND O F APPEAL IS DISMISSED. 7. DURING COURSE OF PROCEEDINGS BEFORE THE TRIBUNAL , LD. AR SUBMITTED THAT THE IMPUGNED TRANSACTIONS OF SALE OF SHARES OF THE THREE COMPANIES MADE TO DIRECTORS WERE A PART OF TH EIR FAMILY ARRANGEMENT AS THE COMPANY WAS AMALGAMATED WITH THE GROUP ITA NO. 1632/AHD/2012 ASST. YEAR 2009-10 7 COMPANY WHICH IS A LISTED ENTITY. AS REGARDS MARKET PRICE OF SHARES IT IS TO BE NOTED THAT BEING A UNLISTED AND RATHER A P RIVATE LIMITED COMPANY PRICING IS NOT AVAILABLE AND PRICE PAID IS A MUTUALLY AGREED PRICE BETWEEN THE BUYERS AND SELLERS FOR THE TRANSA CTIONS AND NO MARKET PROOF IS AVAILABLE. HOWEVER, SALE NOTE/DEBIT NOTE RAISED BY THE COMPANY IN SUPPORT OF THE PRICE OF THE TRANSACTED S HARES WERE DULY SUBMITTED BEFORE LD. ASSESSING OFFICER ON 21.07.201 1. FURTHER NON- LISTED SECURITIES CAN BE EXECUTED ONLY IN THE OFF M ARKET MODE. AS REGARDS ALLEGATION OF LD. ASSESSING OFFICER THAT IN THE PREVIOUS YEAR ALSO ASSESSEE HAS BOOKED ARTIFICIAL LOSS, LD. AR SU BMITTED THAT IT SEEMS THAT LD. ASSESSING OFFICER HAS MISUNDERSTOOD THE NATURE OF TRANSACTION THAT IN THE YEAR UNDER APPEAL THERE IS A GAIN IN OVERALL TRANSACTION OF INVESTMENT WHEREAS IN PREVIOUS YEAR THERE WAS A LOSS IN TRADING OF SHARES. FURTHER LD. ASSESSING OFFICER DID NOT APPRECIATE THE FACT THAT IMPUGNED TRANSACTIONS ARE NOT SPECULA TIVE IN NATURE AS THERE WAS PROPER DELIVERY OF EQUITY SHARES THROUGH SHARE TRANSFER DEED FORM, AND PAYMENT HAS BEEN RECEIVED BY ACCOUNT PAYEE CHEQUE. LD. AR ALSO SUBMITTED THAT REVENUE HAS NOT OBJECTED TO THE LONG TERM CAPITAL GAIN OF RS.2,97,13,752/- WHICH HA S ALSO BEEN EARNED THROUGH SALE OF SHARES OF GROUP COMPANIES AN D CERTAINLY WHEN SIMILAR TRANSACTIONS WHICH HAS FETCHED LONG TE RM CAPITAL GAIN HAS BEEN ACCEPTED THEN THERE REMAINS NO REASON FOR NOT ACCEPTING SIMILAR TRANSACTIONS IN THE GROUP COMPANY WHICH HAS GIVEN RISE TO THE SHORT TERM CAPITAL LOSS. FURTHER AS REGARDS THE ALL EGATION OF LD. ASSESSING OFFICER THAT THE ALLEGED TRANSACTIONS ARE SHAM TRANSACTIONS BECAUSE THEY ARE BETWEEN PROMOTERS AND RELATED PART IES AND THERE IS NO MOVEMENT OF FUNDS, IT IS TO BE NOTED THAT THERE IS A PROPER ITA NO. 1632/AHD/2012 ASST. YEAR 2009-10 8 MOVEMENT OF FUNDS OF ACTUAL RECEIPT FOR THE SHARES SOLD ALONG WITH PHYSICAL DELIVERY. FURTHER KIND ATTENTION IS DRAWN TO THE RECENT DECISION OF THE CO-ORDINATE BENCH IN THE CASE OF HA SMUKHBHAI M. PATEL VS. ACIT 46 SOT 419 WHEREIN IT IS CLARIFIED T HAT SINCE THE SHARES ARE DULY TRANSACTED AND RECORDED IN THE BOOK S OF ACCOUNTS AND FURTHER THE ASSESSEE ALSO EXPLAINED CIRCUMSTANC ES IN WHICH HE SOLD THE SHARES, THERE WAS NO JUSTIFICATION FOR DIS ALLOWING CAPITAL LOSS FROM SALE OF SHARES. ALSO IT IS BASELESS TO CALL THE TRANSACTION AS SHAM TRANSACTIONS AS BOTH THE PARTIES WERE IN EXI STENCE I.E. BUYER AND SELLER, SHARES IN QUESTION WERE ALREADY TRANSFE RRED TO BUYER, CONSIDERATION IS ALSO FULLY RECEIVED BY THE SELLER AND DULY ACCOUNTED FOR. 8. FURTHER LD. ASSESSING OFFICER HAS NOT CONSIDERED THE TRANSACTIONS OF PROFIT NATURE AS SHAM TRANSACTION, WHICH WERE ALSO ENTERED OFF MARKET AND EXECUTED BETWEEN RELATED P ARTIES AS MENTIONED IN THE COMPUTATION OF INCOME AND HAS, THE REFORE, ACTED WITH BIAS MIND FOR THE TREATMENT OF SALE OF INVESTM ENT ON TWO DIFFERENT FOOTINGS AS PER HIS OWN WILL. LD. AR ALSO OBJECTED TO THE OBSERVATION OF LD. ASSESSING OFFICER THAT IN THE EVENT IF THE T RANSACTION IS TREATED AS GENUINE, THE LOSS SHOULD BE CONSIDERED AS SPECUL ATION AS NO EVIDENCE OF DELIVERY OF SHARES IS GIVEN. LD. AR FIR MLY ARGUED THAT THERE WAS PROPER DELIVERY OF EQUITY SHARES OF PRIVA TE LIMITED COMPANIES THROUGH SHARE TRANSFER DEED AND BANK ACCO UNT CLEARLY INDICATES THAT THE SALE CONSIDERATION HAS BEEN PAS SED WHICH IS CONTRARY TO THE ALLEGATION OF LD. ASSESSING OFFICER THAT ONLY LOSS AMOUNT HAS BEEN PAID. ITA NO. 1632/AHD/2012 ASST. YEAR 2009-10 9 9. FURTHER SINCE THE TRANSACTION BETWEEN THE RELATE D PARTIES DOES NOT CHANGE THE CHARACTER OF TRANSACTION AS SPECULAT IVE OR NON- SPECULATIVE ONLY BUT IF THE CONDITION SPECIFIED IN SECTION 43(5) IS FULFILLED IT IS A NON-SPECULATIVE TRANSACTION WHICH IS NOT SO IN THE CASE OF ASSESSEE AND THEREFORE, LOSS FROM SALE OF SHARES BY THE COMPANY SHOULD BE TREATED AS SHORT TERM CAPITAL LOSS. 10. LD. AR FURTHER SUBMITTED THAT THE ID. CIT(A) HA S DISMISSED THE GROUND WITHOUT PROPER CONSIDERATION AND APPRECIATIO N OF THE ELABORATE SUBMISSIONS AND EXPLANATION FILED DULY SUPPORTED BY EVIDENCES. THE AO HAD TREATED THE TRANSACTIONS OF SALE OF SHAR ES RESULTING IN SHORT TERM CAPITAL LOSS OF RS.1,75,50,000/- AS SHAM TRANSACTIONS MAINLY ON THE GROUND THAT THEY WERE OFF MARKET TRAN SACTIONS AND NOT EXECUTED THROUGH STOCK EXCHANGE. LD. AR SUBMITTED T HAT THE TRANSACTIONS ENTERED INTO BY THE COMPANY IN RESPECT OF SALE OF SHARES OF GROUP COMPANIES TO THE DIRECTORS ARE GENUINE TRA NSACTIONS DULY SUPPORTED BY EVIDENCES. THAT APART, THE AO AND THE ID. CIT(A) FAILED TO APPRECIATE THE FACT THAT OFF MARKET TRANSACTIONS ARE LEGAL AND VALID TRANSACTIONS AND NOT BARRED BY THE INCOME-TAX ACT. FURTHER, SINCE THE SALE OF SHARES WERE OF UNLISTED COMPANIES, OFF MARK ET TRANSACTION WAS THE ONLY OPTION FOR SALE / TRANSFER OF SUCH SHARES. IN ORDER TO JUSTIFY GENUINENESS OF SUCH TRANSACTIONS, IT WAS SUBMITTED TO THE AO THAT THE SAME WERE DONE AS PART OF FAMILY ARRANGEMENT AN D THAT TO AT FACE VALUE OF THE SHARES BECAUSE THE COMPANY IS BEING WO UND UP UNDER THE SCHEME OF AMALGAMATION AS ALSO DISCLOSED IN THE DIRECTORS REPORT. THE SHARES WERE SOLD TO THE DIRECTORS SO TH AT MAJORITY OF STAKE ITA NO. 1632/AHD/2012 ASST. YEAR 2009-10 10 OF SUCH PRIVATE LIMITED COMPANIES DO NOT GET TRANSF ERRED IN THE LISTED COMPANY. 11. LD. AR FURTHER SUBMITTED THAT NO EVIDENCES HAVE BEEN BROUGHT ON RECORD BY THE A.O. EXCEPT MERE SURMISES AND ASSU MPTIONS IN SUPPORT OF HIS OBSERVATION THAT THE TRANSACTIONS OF SALE OF SHARES WERE SHAM TRANSACTIONS WITH AN INTENTION TO AVOID TAX. THE OBSERVATION OF THE ID. CIT(A) THAT THE ASSESSEE COMPANY IS A LISTE D COMPANY SINCE 2001 AND ACCORDINGLY HAS NOT BEEN ABLE TO SHOW THAT THE PROCEDURE PRESCRIBED BY SEBI OR OTHER REGULATING AGENCIES HAV E BEEN FOLLOWED AT THE TIME OF PURCHASE AND SALE OF SHARES WHICH CL EARLY PROVES THE MALAFIDE INTENTION OF THE APPELLANT IS GROSSLY INCO RRECT. LD. AR SUBMITTED THAT I T MAY BE NOTED THAT THE ASSESSEE COMPANY WAS NOT A LISTED COMPANY IN THE YEAR OF TRANSFER OF SHARES I. E. A. Y.2009-10 AND HAD IN FACT GOT AMALGAMATED WITH THE LISTED COMPANY 'SURAJ STAINLESS LTD.' DURING A. Y.2010-11 WHOSE NAME WAS SUBSEQUENTLY CHANGED TO 'SURAJ LIMITED 1 . THE PURPOSE OF SALE/TRANSFER OF ALL SHARES OF PRIVATE LIMITED COM PANIES HELD AS INVESTMENT IN THE APPELLANT COMPANY WERE WITH AN IN TENTION THAT ON AMALGAMATION WITH THE LISTED COMPANY THE MAJORITY S TAKE OF SUCH COMPANIES WOULD NOT GET TRANSFERRED TO LISTED COMPA NY APART FROM THE PURPOSE OF FAMILY ARRANGEMENT. THE SHARES IN QUESTI ON OF THE PRIVATE LIMITED COMPANIES WERE TRANSFERRED IN THE NAME OF D IRECTORS AT FACE VALUE AS PART OF FAMILY ARRANGEMENT AS STATED HEREI NABOVE AND THE DELIVERY OF SHARES WERE GIVEN WHILE INCORPORATING T HEIR NAMES IN THE SHARE CERTIFICATE, COPY OF WHICH WERE SUBMITTED TO THE AO. FURTHER, THE SALE CONSIDERATION OF SUCH SHARES HAS BEEN ACTU ALLY RECEIVED BY ITA NO. 1632/AHD/2012 ASST. YEAR 2009-10 11 THE COMPANY AND IS DULY REFLECTED IN THE BANK ACCOU NT AND BOOKS OF ACCOUNTS. THE NECESSARY DOCUMENTS SUCH AS DEBIT/CRE DIT NOTE, COPY OF SHARE TRANSFER FORMS AND BANK STATEMENT AS WELL AS OF THE DIRECTORS AS WELL AS COMPANY SHOWING PAYMENT/RECEIP T OF SALE CONSIDERATION WERE ALSO FURNISHED TO THE A.O. THE C OMPARISON MADE BY THE AO OF THE TRANSACTIONS DURING THE YEAR WITH EARLIER YEARS IS INCORRECT, SINCE IN EARLIER YEARS THE TRANSACTIONS WITH RELATED PARTIES WERE IN RESPECT OF LISTED SECURITIES AND WERE WITHO UT DELIVERY OF SHARES WHILE DURING THE YEAR IT IS OF PRIVATE LIMIT ED COMPANIES WITH PROPER DELIVERY. THE OBSERVATION OF THE A.O. THAT N O CIRCUMSTANCES OR NEED HAS BEEN MENTIONED BY THE COMPANY FOR CARRYING OUT SUCH TRANSACTIONS IS ALSO INCORRECT SINCE THE COMPANY HA D CLEARLY STATED THAT IT WAS BEING WOUND UP UNDER THE SCHEME OF AMAL GAMATION AS DISCLOSED IN THE DIRECTORS' REPORT AND HENCE AS PAR T OF FAMILY ARRANGEMENT, THE SHARES OF GROUP COMPANIES WERE TRA NSFERRED IN THE NAME OF THE DIRECTORS AT FACE VALUE OF SHARES WITH AN INTENTION THAT IT DOES NOT GET TRANSFERRED TO THE LISTED COMPANY WITH WHICH THE COMPANY WAS TO BE AMALGAMATED. THAT APART, LD. AR S UBMITTED THAT DURING THE YEAR UNDER CONSIDERATION, THERE IS MOVEM ENT OF FUNDS AS WELL AS DELIVERY OF SHARES WHICH IS AN UNDISPUTED F ACT AND IS DULY SUPPORTED BY EVIDENCES. AS REGARDS THE VALUE OF SHA RES, IT IS SUBMITTED THAT THE SAME HAS BEEN FIXED BY THE DIREC TORS IN VIEW OF POWERS GRANTED TO THEM AS PER ARTICLE NO. 17 OF ART ICLES OF ASSOCIATION. FURTHER, THE CASE LAWS RELIED UPON BY THE AO IS ALSO NOT RELEVANT TO THE FACTS OF THE COMPANY AND HENCE NOT APPLICABLE. LD. AR FURTHER SUBMITTED THAT THE ARGUMENT OF THE A.O. THAT THE TRANSACTIONS HAVE BEEN CARRIED OUT WITH AN INTENTIO N OF TAX AVOIDANCE ITA NO. 1632/AHD/2012 ASST. YEAR 2009-10 12 IS INCORRECT, SINCE THE COMPANY HAS SHOWN LONG TERM CAPITAL GAIN OF RS.2,97,13,752/- FROM SALE OF SHARES OF PRIVATE LIMITED COMPANY AND HENCE IF TAX AVOIDANCE HAD BEEN THE OBJECT OF T HE COMPANY THEN SUCH LONG TERM CAPITAL GAIN COULD HAVE BEEN CREATED FOR ARTIFICIAL LOSSES AND THERE WOULD NOT HAVE BEEN ANY NEED TO BO OK SO CALLED ARTIFICIAL LOSS OF SHARES IN RESPECT OF PRIVATE LIM ITED COMPANIES ON SHORT TERM BASIS. 12. LD. AR IN SUPPORT OF HIS CONTENTIONS REFERRED A ND RELIED ON THE FOLLOWING JUDGMENTS/DECISIONS :- 1. CIT VS. ENAM SECURITIES (P) LTD. (2012) 345 ITR 64 (MUM H.C.) 2. KAMESHWARI FINANCE & LEASING (P) LTD. VS. DY. CI T (2007) 109 ITR 173 (DEL. ITAT) 3. CIT VS. OBEROI HOTELS PVT. LTD. (2011)334 ITR 29 3 (CAL.H.C.) 4. HASMUKHBHAI M. PATEL VS. ACIT CIR.1(1), BARODA ( 2011) 12 TAXMANN.COM 300 (AHD) 5. ACIT VS. BIRAJ INVESTMENT PVT. LTD. TAX APPEAL N O.260 OF 2000 (GUJ.H.C.) 13. ON THE OTHER HAND, LD. DR VEHEMENTLY ARGUED AND SUPPORTED THE ORDERS OF LOWER AUTHORITIES AND ALSO SUBMITTED THAT COLOURABLE DEVICE HAS BEEN USED BY THE ASSESSEE IN ORDER TO EV ADE TAX FOR SETTING OFF OF SHORT TERM CAPITAL LOSS AS AGAINST L ONG TERM CAPITAL GAIN BY WAY OF MAKING SALE OF SHARES TO THE RELATED PART IES AT A VERY LOW PRICE AS COMPARED TO THE PURCHASE PRICE. LD. DR FUR THER SUBMITTED THAT PURCHASE AND SALE OF SHARES GIVING RISE TO THE CAPITAL LOSS ARE RATHER SHAM TRANSACTIONS WITH A VIEW TO EVADE TAX. 14. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIAL PLACED BEFORE US AND ALSO GONE THROUGH THE DECISION S RELIED ON. THROUGH THIS GROUND ASSESSEE IS AGGRIEVED WITH THE ORDER OF LD. ITA NO. 1632/AHD/2012 ASST. YEAR 2009-10 13 CIT(A) CONFIRMING THE ACTION OF LD. ASSESSING OFFIC ER TREATING SHORT TERM CAPITAL LOSS OF RS.1,75,50,000/- AS SHAM TRANS ACTION AS WELL AS SPECULATIVE IN NATURE. FROM PERUSAL OF RECORD WE FI ND THAT IN THE COMPUTATION OF INCOME ASSESSEE HAS SHOWN LONG TERM CAPITAL GAIN OF RS.2,97,13,752/- FROM SALE OF 3336 SHARES OF KAMLA MANSIONS PVT. LTD. AGAINST THIS LONG TERM CAPITAL GAIN OF RS.2,91 ,13,752/- ASSESSEE HAS CLAIMED SHORT TERM CAPITAL LOSS OF RS.1,75,50,0 00/- FROM SALE OF SHARES OF THREE COMPANIES PURCHASED ON 22.2.2008. D ETAILS OF TRANSACTIONS GIVING RISE TO THE SHORT TERM CAPITAL LOSS OF RS.1,75,50,000/- ARE AS UNDER :- SL. NO. NAME OF COMPANY WHOSE SHARES WERE SOLD , NO. OL SHARES DOTE OF PURCHASE BY ME COMPANY PURCHASE PRICE DATE OF SALE TO PERSONS SPECIFIED SALE PRICE TOSS 1, SURAJ COMMODITY PVT LTD 15000 22/02/08 6000000 23/12/03 150000 5850000 2. SURAJ RETAIL PVT. LTD 15000 22/02/08 6000000 23/12/08 150000 5850000 3; SURAJ STAR TRACING PVT. LTD 15000 22/02/03 6000000 23/12/08 150000 5850000 1,80,00,000 4,50,000 1,75,50,000 DURING THE COURSE OF ASSESSMENT PROCEEDINGS ON EXAM INATION OF THE TRANSACTIONS RELATING TO SHORT TERM CAPITAL LOSS LD . ASSESSING OFFICER WAS OF THE VIEW THAT THESE TRANSACTIONS ENTERED INT O BETWEEN THE ASSESSEE COMPANY AND THE DIRECTORS ARE IN THE FORM OF COLOURABLE DEVICE WITH AN INTENTION TO SET OFF SHORT TERM CAPI TAL LOSS AGAINST LONG TERM CAPITAL GAIN IN ORDER TO EVADE TAX AND FURTHER OBSERVED THAT THIS IMPUGNED TRANSACTION IS SPECULATIVE IN NATURE AS TH EY HAVE BEEN ITA NO. 1632/AHD/2012 ASST. YEAR 2009-10 14 ENTERED IN THE OFF MARKET WITH THE RELATED PARTIES U/S 40A(2)(B) OF THE ACT WITHOUT MOVEMENT OF FUNDS AND ARE OF SUSPICIOUS IN NATURE. LD. ASSESSING OFFICER HAS ALSO OBSERVED THAT SIMILAR TR ANSACTIONS WERE ENTERED INTO IN ASST. YEAR 2007-08 AND 2008-09 AND ASSESSEE HAS ADOPTED SIMILAR METHOD OF BOOKING ARTIFICIAL LOSS W ITHOUT DELIVERY. 15. WE OBSERVE THAT THERE WAS A FAMILY ARRANGEMENT AND AMALGAMATION OF THE COMPANY WITH SURAJ STAINLESS LT D. WITH EFFECT FROM 5 TH AUGUST, 2010 (SCHEME DULY APPROVED BY HON. GUJARAT HIGH COURT) AND THE SHARES WERE SOLD TO THE DIRECTORS SO THAT THE SHARES DID NOT TRANSFER TO THE LISTED COMPANY. FURTHER WE ALSO OBSERVE THAT ASSESSEE ENTERED INTO OFF MARKET TRANSACTIONS BY WA Y OF PHYSICALLY TRANSFERRING THE SHARES THROUGH SHARE TRANSFER DEED TO IDENTIFIED BUYERS BY WAY OF RECEIVING SALE CONSIDERATION BY AC COUNT PAYEE CHEQUE. FURTHER AS MENTIONED BY LD. AR THERE WAS A FAMILY ARRANGEMENT AND SHARES HAVE BEEN SOLD SO THAT MAJOR ITY STAKE OF THE PRIVATE LIMITED COMPANY DID NOT TRANSFER IN THE LIS TED COMPANY. THERE WAS ALSO A TRANSACTION OF LONG TERM CAPITAL GAIN OF THE GROUP COMPANY THROUGH WHICH ASSESSEE EARNED RS.2,97,13,752/- AS L ONG TERM CAPITAL GAIN AND THE GENUINENESS AND AUTHENTICITY OF THE LO NG TERM CAPITAL GAIN TRANSACTION HAS NOT BEEN DISPUTED BY THE LD. A SSESSING OFFICER. WE FURTHER OBSERVE THAT THE VIEW TAKEN BY LD. ASSES SING OFFICER ABOUT THE IMPUGNED TRANSACTION OF SHORT TERM CAPITAL LOSS OF RS.1,75,50,000/- AS SPECULATIVE IN NATURE CANNOT ST AND FOR IN THE GIVEN CIRCUMSTANCES WHERE THERE IS PHYSICAL DELIVER Y OF SHARES BY THE COMPANY AT THE TIME OF PURCHASE ON 22.2.2008, PHYSI CAL DELIVERY OF SHARES AT THE TIME OF SALE ON 23.12.2008, FULL VALU E OF CONSIDERATION ITA NO. 1632/AHD/2012 ASST. YEAR 2009-10 15 FOR PURCHASE AND SALE HAS BEEN ENTERED THROUGH ACCO UNT PAYEE CHEQUE. COPIES OF SHARE TRANSFER DEEDS ARE AVAILABL E ON PAPER BOOK FROM PAGES 39 TO 56. DETAILS OF SHARES TRANSFER ARE DULY RECORDED IN THE STATUTORY BOOKS OF THE COMPANY AND ALSO BEING F ILED IN THE ANNUAL RETURN SUBMITTED WITH THE REGISTRAR OF COMPANIES. 16. WE FURTHER FIND THAT THE OBSERVATION OF LD. ASS ESSING OFFICER THAT THE TRANSACTIONS ENTERED INTO IN THIS YEAR ARE SIMI LAR TO THOSE ENTERED IN ASST. YEAR 2007-08 AND 2008-09 IS ALSO NOT CORRE CT FOR THE REASONS THAT IN THE PREVIOUS YEAR THE TRANSACTIONS WERE IN THE LISTED SECURITIES WHEREAS IN THE CURRENT YEAR THE TRANSACTIONS ARE FO R SALE OF SHARES OF PRIVATE LIMITED COMPANY ENTERED INTO ON OFF MARKET . 17. AS REGARDS THE ISSUE RAISED BY ASSESSING OFFICE R ABOUT THE GENUINENESS OF THE MARKET PRICE OF SHARES SOLD WE F IND THAT AMENDMENT BY FINANCE ACT, 2010 W.E.F. 1.6.2010 SEC. 56(2)(VIIA) HAS BEEN INSERTED WHICH CONTEMPLATES THAT SHARES OF A C OMPANY NOT BEING A COMPANY IN WHICH THE PUBLIC ARE SUBSTANTIAL LY INTERESTED, RECEIVES IN ANY PREVIOUS YEAR FROM ANY PERSON OR P ERSONS ON OR AFTER THE 1 ST DAY OF JUNE, 2010, ANY PROPERTY, BEING SHARES OF A COMPANY NOT BEING A COMPANY IN WHICH THE PUBLIC ARE SUBSTAN TIALLY FOR A CONSIDERATION WHICH IS LESS THAN THE AGGREGATE FAIR MARKET VALUE OF THE PROPERTY BY AN AMOUNT EXCEEDING FIFTY THOUSAND RUPEES THE AGGREGATE FAIR MARKET VALUE OF SUCH PROPERTY AS EXC EEDS SUCH CONSIDERATION SHALL BE TREATED AS INCOME OF THE ASS ESSEE. ITA NO. 1632/AHD/2012 ASST. YEAR 2009-10 16 18. HOWEVER, AS WE ARE DEALING WITH ASST. YEAR 2009 -10 AND THE ABOVE AMENDMENT HAS BEEN BROUGHT IN FORCE FROM 1.6. 2010 AND THE SAME WOULD NOT BE APPLICABLE IN THE CASE OF ASSESSE E. 19. WE FURTHER OBSERVE THAT SIMILAR ISSUE CAME UP B EFORE THE CO- ORDINATE BENCH IN THE CASE OF HASMUKH M. PATEL VS. ACIT (2012) 12 TAXMANN.COM300 (AHD) WHEREIN PROVIDING THE BELOW FA CTS AND DECISION TAKEN BY THE CO-ORDINATE BENCH READS AS UN DER :- FACTS-II THE ASSESSEE SOLD CERTAIN SHARES OF COMPANY 'A 1 AND CLAIMED CAPITAL LOSS. THE SHARES WERE TRANSFERRED AT VALUE AS CERTIFIED BY AUDITORS OF CO MPANY 'A'. THE ASSESSING OFFICER DISALLOWED THE LOSS HOLDING THAT THE ASSESSEE HAD SOLD THE SHA RE SO AS TO SET OFF THE LOSS AGAINST THE GAINS ARISING ON THE SALE OF LAND. ON APPEAL, THE COMMISS IONED APPEALS) UPHELD THE ORDER OF THE ASSESSING OFFICER. HELD-II IT WAS FOUND THAT THE ASSESSEE HAD GIVEN THE COPY O F THE TRANSFER DEED, SHARE CERTIFICATE AS WELL AS SHAREHOLDERS REGISTERED. THESE DOCUMENTS CL EARLY SHOWED THAT THE ASSESSEE HAD TRANSFERRED SHARES OF 'A' TO 'P'. DURING THE ACCOUN TING YEAR RELEVANT TO THE ASSESSMENT YEAR UNDER CONSIDERATION, THE SHARES WERE DULY TRAN SFERRED AND ALSO RECORDED IN THE BOOKS OF THE COMPANY. THE SHARES WERE SOLD AT THE R ATE OF RS. 5 PER SHARE. CHARTERED ACCOUNTANT HAVE VALUED THE SHARES AT RS. 4.73 PER S HARE. THE ASSESSEE VALUED THE SHARES BY ADOPTING THE MARKET VALUE OF THE ASSET. NO INFIR MITY IN THE WORKING OF THE AUDITOR WAS POINTED OUT. THE ASSESSEE HAD SOLD THE SHARES AT A VALUE SLIGHTLY HIGHER THAN THE MARKET VALUE DETERMINED BY THE AUDITOR. THE ASSESSEE HAD A LSO EXPLAINED THE CIRCUMSTANCES IN WHICH HE SOLD THE SHARES. CONSIDERING THE TOTALITY OF THE FACTS AND CIRCUMSTANCES THERE WAS NO JUSTIFICATION FOR DISALLOWING THE CAPITAL LO SS FROM THE SALE OF THE SHARES. [PARA LL] 20. WE FURTHER OBSERVE THAT HON. JURISDICTIONAL HIG H COURT IN THE CASE OF ACIT VS. BIRAJ INVESTMENT PVT. LTD. IN TAX APPEAL NO.260 OF 2000 HAS DEALT WITH SIMILAR ISSUE WHEREIN ASSESSEE SOLD CERTAIN SHARES OF RUSTOM SPINNERS LTD. AND HAD SHOWN A LONG TERM CAPITAL GAIN OF RS.1,46,792/- AND SHORT TERM CAPITAL GAIN O F RS.7,41,563/- ON SALE OF SUCH SHARES. THE ASSESSEE HAD ALSO SOLD 802 00 EQUITY SHARES ITA NO. 1632/AHD/2012 ASST. YEAR 2009-10 17 OF RUSTOM MILLS AND INDUSTRIES LTD. FOR TOTAL CONSI DERATION OF RS.4,01,000/- AND INCURRED A LONG TERM CAPITAL LOSS OF RS.8,38,798/-. OBSERVING ALL THESE FACTS LD. ASSESSING OFFICER WAS OF THE VIEW THAT ENTIRE TRANSACTION WHICH HAS BEEN ENTERED INTO BETW EEN THE GROUP COMPANY ARE OF A COLOURABLE DEVICE AS THE ASSESSEE COMPANY AND THE PURCHASING COMPANY HAD COMMON DIRECTORS. HOWEVE R, HON. JURISDICTIONAL HIGH COURT ADJUDICATED THE ABOVE FAC TS AND DECIDED THE ISSUE IN FAVOUR OF ASSESSEE BY OBSERVING AS UNDER : - 14. HAVING THUS HEARD THE LEARNED COUNSEL FOR THE P ARTIES, WE FIND THAT THE RELEVANT FACTS ARE NOT IN DISPUTE. THE RESPONDENT ASSESSEE SOLD SHARES OF RUS TOM MILLS AND INDUSTRIES LTD FOR A SUM OF RS.4,01,000/- ON WHICH TRANSACTION, THE ASSESSEE CL AIMED LONG TERM CAPITAL LOSS OF RS.8,38,7907-. DURING THE SAME PERIOD, THE ASSESSEE ALSO SOLD CERT AIN SHARES OF RUSTOM SPINNERS LTD. AND SHOWED LONG TERM CAPITAL GAIN OF RS.1,46,792 AND SH ORT TERM CAPITAL GAIN OF RS.7,41,563/-. IT IS ALSO NOT IN DISPUTE THAT THE SHARES OF RUSTOM MILLS AND INDUSTRIES LTD. WERE PLEDGED BY THE ASSESSEE WITH IDBI BANK. THE ORIGINAL SHARE CERTIFI CATES ALONG WITH THE TRANSFER FORM DULY SIGNED BY THE ASSESSEE WERE IN POSSESSION OF THE IDBI BANK . THE ASSESSEE HAD ALSO UNDERTAKEN NOT TO TRANSFER SUCH SHARES. 15. DESPITE SUCH FACTS, WE ARE OF THE OPINION THAT THE ASSESSEE HAVING ENTERED INTO THE AGREEMENT DATED 24 TH MARCH 1993 WITH THE PURCHASER COMPANY AND FURTHER HAVING GIVEN POWER OF ATTORNEY DATED 30 TH MARCH 1993 AND RECEIVED THE FULL SALE CONSIDERATIO N FROM THE PURCHASER COMPANY, BY VIRTUE OF SECTION 2(47) OF THE ACT FOR THE PURPOSE OF INCOME TAX, TRANSFER OF SHARE WAS COMPLETE. SECTION 2(47) AS IS WELL KNOWN DEFINES TRANSFER IN RELATION TO A CAPITAL ASSET AS UNDER: '(47) 'TRANSFER: IN RELATION TO A CAPITAL ASSET, IN CLUDES (I). THE SALE EXCHANGE OR RELINQUISHMENT OF THE ASS ET; OR (II). THE EXTINGUISHMENT OF ANY RIGHTS THEREIN; OR (III) THE COMPULSORY ACQUISITION THEREOF UNDER ANY LAW; OR (IV) IN A CASE WHERE THE ASSET IS CONVERTED BY THE OWNER THEREOF INTO, OR IS TREATED BY HIM AS, STOCK-IN-TRADE OF A BUSINESS CARRIED ON BY HIM, SUC H CONVERSION OR TREATMENT; OR (V) ANY TRANSACTION INVOLVING THE ALLOWING OF THE P OSSESSION OF ANY IMMOVABLE PROPERTY TO BE TAKEN OR RETAINED IN PART PERFORMANCE OF A CONTRACT OF THE NATURE REFERRED TO IN SECTION 53 A OF THE TRANSFER OF PROPERTY ACT, 1982 (4 OF 1882) ; OR (VI) ANY TRANSACTION (WHETHER BY WAY OF BECOMING A MEMBER OF, OR ACQUIRING SHARES IN, A CO- OPERATIVE SOCIETY, COMPANY OR OTHER ASSOCIATION OF PERSONS OR BY WAY OF ANY AGREEMENT OR ANY ARRANGEMENT OR IN ANY OTHER MANNER WHATSOEVER) WHICH HAS THE EFFECT OF TRANSFERRING, OR ENABLING THE ENJOYMENT OF, ANY IMMOVABLE PROPERT Y. EXPLANATION - FOR THE PURPOSE OF SUB-CLAUSES (V) AN D (VI) 'IMMOVABLE PROPERTY' SHALL HAVE THE SAME MEANING AS IN CLAUSE (D) OF SECTION 269UA.' ITA NO. 1632/AHD/2012 ASST. YEAR 2009-10 18 IT MAY BE THAT BY VIRTUE OF PLEDGING OF SHARES WITH IDBI, HAVING HANDED OVER THE ORIGINAL SHARE CERTIFICATES TO SUCH FINANCIAL INSTITUTION ALONG WI TH THE DULY SIGNED TRANSFER FORMS, IN SO FAR AS THE ASSESSEE'S RELATION WITH IDBI IS CONCERNED, THERE W OULD BE A SERIOUS QUESTION OF VALIDITY OF SUCH TRANSACTION. WE ARE, HOWEVER, IN THE PRESENT PROCEE DINGS, NOT CONCERNED WITH SUCH INTERNAL POSSIBLE DISPUTE BETWEEN THE ASSESSEE AND THE SAID FINANCIAL INSTITUTION. IT MAY ALSO BE THAT IF THE PURCHASER COMPANY DESIRED TO HAVE SUCH SHARES TRANS FERRED IN ITS NAME, SUCH ATTEMPT WOULD RUN INTO SERIOUS ROAD BLOCK. PRIMARILY, WITHOUT THE ORI GINAL SHARE CERTIFICATES IN POSSESSION OF THE PURCHASER COMPANY, WHICH WAS IN POSSESSION OF THE I DBI BANK, THE COMPANY WOULD NOT, IN VIEW OF SECTION 108 OF THE COMPANIES ACT, BE ABLE TO REG ISTER SUCH TRANSFER. SUB-SECTION (1) OF SECTION 108 PROVIDES THAT A COMPANY SHALL NOT REGISTER A TR ANSFER OF SHARES IN OR DEBENTURES OF, UNLESS A PROPER INSTRUMENT OF TRANSFER DULY STAMPED AND EXEC UTED BY OR ON BEHALF OF THE TRANSFEROR AND BY OR ON BEHALF OF THE TRANSFEREE AND FURTHER FULFILLI NG THE PROCEDURAL REQUIREMENTS SPECIFIED THEREIN HAS BEEN DELIVERED TO THE COMPANY ALONG WITH THE CE RTIFICATE RELATING TO THE SHARES OR DEBENTURES ALONG WITH THE LETTER OF ALLOTMENT OF SHARES OR DEB ENTURES. THEREFORE, IT WOULD NOT BE DIFFICULT TO ENVISAGE THAT IF THE PURCHASER COMPANY HAD TRIED TO REGISTER THE SAME IN ITS NAME BY VIRTUE OF THE PRESENT TRANSFER, SUCH ATTEMPT WOULD BE MET WITH ST IFF RESISTANCE FROM IDBI BANK. 16. IN THE PRESENT PROCEEDINGS, HOWEVER, WE ARE NOT CONCERNED WITH SUCH INTERNAL DISPUTES. WE ARE PRIMARILY CONCERNED WITH THE QUESTION WHETHER B Y VIRTUE OF THE AGREEMENT DATED 24 TH MARCH 1993, AND THE IRREVOCABLE POWER OF ATTORNEY GIVEN B Y THE ASSESSEE TO THE PURCHASER COMPANY ON 30 TH MARCH 1993, AND ALSO HAVING RECEIVED THE FULL SALE PRICE OF THE SHARES, SECTION 2(47) OF THE ACT APPLY. IN OUR OPINION, THE ASSESSEE DID TRANSFE R WHATEVER RIGHTS IT HAD IN THE SHARES TO THE PURCHASER COMPANY. IF SUCH TRANSFER IS NOT RECOGNIZ ED BY THE IDBI AND THERE ARE OTHER LEGAL IMPLICATIONS OF BREACH OF UNDERTAKING GIVEN TO IDBI , SUCH ISSUE WOULD HAVE TO BE THRASHED OUT BETWEEN THE CONCERNED PARTIES. INSOFAR AS INCOME TA X PROCEEDINGS ARE CONCERNED, WE ARE OF THE OPINION THAT BY VIRTUE OF SECTION 2(47) OF THE ACT, THE ASSESSEE WAS ENTITLED TO CLAIM THAT UPON TRANSFER OF SHARES OR INTEREST THEREON, IT HAD SUFF ERED LONG TERM CAPITAL LOSS WHICH IT WAS ENTITLED T O SET OFF AGAINST THE CAPITAL GAIN ON SALE OF SHARES DURING THE SAME PREVIOUS YEAR. 17. WE ARE NOT INCLINED TO ACCEPT THE REVENUE'S CON TENTION THAT THIS WAS A COLOURABLE DEVICE AND THAT THE ENTIRE ARRANGEMENT WAS A PAPER ARRANGEMENT . FIRSTLY, THERE IS NO PROVISION IN THE ACT WHICH WOULD PREVENT THE ASSESSEE FROM SELLING LOSS MAKING SHARES. SIMPLY BECAUSE SUCH SHARES WERE SOLD DURING THE PREVIOUS YEAR WHEN THE ASSESSE E HAD ALSO SOLD SOME SHARES AT PROFIT BY ITSELF WOULD NOT MEAN THAT THIS IS A CASE OF COLOURABLE DE VICE OR THAT THERE IS A CASE OF TAX AVOIDANCE. FURTHER, THERE IS NO RESTRICTION THAT SUCH SALE OR TRANSACTION CANNOT BE EFFECTED WITH A GROUP COMPANY. AS LONG AS THE REVENUE COULD NOT DOUBT THE SALE PRICE OF THE SHARES, IT WOULD NOT BE OPEN FOR THE REVENUE TO CONTEND THAT THE ASSESSEE H AD SHOWN LOSS WHICH IT DID NOT REALLY SUFFER. IN THE PRESENT CASE, IT IS NOT EVEN THE CASE OF THE RE VENUE THAT SHARES WERE SOLD AT A PRICE LOWER THAN THE MARKET RATE. IF THAT BE SO, THE QUESTION OF INF LATING THE LOSS BY TRANSFERRING THE SHARES TO GROUP COMPANY WOULD NOT ARISE. UNDER ORDINARY CIRCUMSTANC ES, IT IS ALWAYS OPEN TO THE ASSESSEE IN HIS OWN WISDOM TO EITHER HOLD ON TO CERTAIN BUNCH OF SH ARES OR TO SELL THE SAME TO AVOID FURTHER LOSS, IF HE FINDS THAT MARKET VALUE OF THE SHARES IS FAST DIMINISHING. IT IS EQUALLY OPEN FOR THE ASSESSEE T O EFFECT SUCH SALE DURING THE SAME YEAR WHEN HE ALSO CHOOSES TO DISPOSE OF CERTAIN PROFIT MAKING SHARES. IN THE PRESENT CASE, OF COURSE, THERE IS A FURTHER ANGLE OF THE SHARES IN QUESTION BEING PLEDGED TO IDBI AND THEREFORE IT WOULD NOT BE POSSI BLE FOR THE ASSESSEE TO DELIVER THE ORIGINAL SHARE CERTIFICATES TO ITS PURCHASER ALONG WITH THE DULY SIGNED TRANSFER FORMS. AS ALREADY NOTED, SUCH SPECIAL ANGLE MAY HAVE REPERCUSSION INSOFAR AS THE LEGAL RELATION BETWEEN THE ASSESSEE AND THE IDBI IS CONCERNED AND INSOFAR AS THE PURCHASER' S RIGHT TO HAVE SHARES TRANSFERRED IN ITS NAME IS CONCERNED. THIS, HOWEVER, BY ITSELF WOULD NOT ESTAB LISH THAT THE SALE OF SHARES WAS ONLY A PAPER ITA NO. 1632/AHD/2012 ASST. YEAR 2009-10 19 TRANSACTION AND A DEVICE CONTRIVED BY THE ASSESSEE TO CLAIM LOSS WHICH IT DID NOT SUFFER AND THEREBY SEEK SET OFF AGAINST THE CAPITAL GAIN RECEI VED BY IT DURING THE YEAR UNDER CONSIDERATION. 18. IN THE CASE OF COMMISSIONER OF INCOME TAX V. SA KARLAL BALABHAI, 69 ITR 186, A DIVISION BENCH OF THIS COURT OBSERVED THAT AVOIDANCE OF TAX CANNOT INCLUDE EVERY CASE OF REDUCTION OF TAX LIABILITY OF AN ASSESSEE. THE ASSESSEE MAY ENTER IN TO A TRANSACTION WHICH HAS THE EFFECT OF DIMINISHING HIS INCOME AND CONSEQUENTLY REDUCING HI S TAX LIABILITY. IN SUCH A CASE, THERE WOULD BE NO AVOIDANCE OF TAX, FOR EXAMPLE, A CASE WHERE THE ASSESSEE MAKES A GIFT OF SHARES TO HIS SON. BY REASON OF GIFT INCOME FROM THE SHARES WOULD NOT ACC RUE TO THE ASSESSEE BUT WOULD ACCRUE TO THE SON AND TO THAT EXTENT THE INCOME OF THE ASSESSEE W OULD BE DIMINISHED AND HIS TAX LIABILITY REDUCED. THIS CANNOT BE REGARDED AS A CASE OF TAX A VOIDANCE EVEN IF THE MOTIVE OF THE ASSESSEE IN MAKING THE GIFT WAS TO SAVE TAX ON THE INCOME FROM SHARES AT A HIGHER RATE APPLICABLE TO HIM. 18. UNDER THE CIRCUMSTANCES, EVEN WITHOUT REFERRING TO THE DECISION OF THE APEX COURT IN THE CASE OF AZADI BACHAO ANDOLAN (SUPRA)AND THE OBSERVATIONS MADE IN THE LATER DECISION IN THE CASE OF VODAFONE (SUPRA), WE DO NOT FIND THAT THIS A CASE W HICH WOULD FALL WITHIN THE PARAMETERS OF THE DECISION IN THE CASE OF MCDOWELL & COMPANY LTD (SUP RA). 19. IN THE RESULT, WE ANSWER THE QUESTIONS IN THE A FFIRMATIVE, I.E. IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE. TAX APPEAL IS ACCORDINGLY DISM ISSED. 21. ANALYSING THE FACTS IN THE CASE OF ASSESSEE IN THE LIGHT OF JUDGMENT OF HON. HIGH COURT AND THE DECISION OF THE CO-ORDINATE BENCH REFERRED ABOVE THE IMPUGNED TRANSACTION GIVIN G RISE TO THE SHORT TERM CAPITAL LOSS OF RS.1,75,50,000/- IS NEIT HER A SHAM TRANSACTION NOR SPECULATIVE IN NATURE DUE TO OUR OB SERVATIONS WHICH READ AS BELOW :- (A) ASSESSEE HAS ENTERED INTO THE IMPUGNED TRANSACT ION OF SALE OF SHARES OFF MARKET IN THE NORMAL COURSE IN VIEW OF THE FORTHCOMING AMALGAMATION OF THE GROUP COMPANIES WHICH HAS GIVE N RISE TO LONG TERM CAPITAL GAIN AND SHORT TERM CAPITAL LOSS. (B) NO ANOMALY HAS BEEN FOUND BY REVENUE IN THE TRA NSACTION GIVING RISE TO LONG TERM CAPITAL GAIN. ITA NO. 1632/AHD/2012 ASST. YEAR 2009-10 20 (C) THERE IS NO PROVISION IN THE ACT WHICH PREVENTS THE ASSESSEE FROM SELLING SHARES AT A LOSS. (D) THERE HAS BEEN PHYSICAL DELIVERY OF PURCHASE AN D SALE OF SHARES THROUGH SHARE TRANSFER DEED FINDING ITS PROP ER PLACE IN THE STATUTORY RECORDS PREPARED BY THE COMPANY AND DULY SUBMITTED TO THE REGISTRAR OF COMPANIES IN THE ANNUAL RETURN. (E) IDENTITY OF THE BUYERS IS NOT IN DISPUTE. (F) THE TRANSACTIONS OF PURCHASE MADE BY THE ASSESS EE PURCHASING SHARES AT RS.1,80,00,000/- IN F.Y.2007-0 8 IS NOT IN DISPUTE. (G TRANSACTIONS OF PURCHASE AND SALE HAVE BEEN ENTE RED THROUGH PROPER BANKING CHANNEL. (H) REVENUE HAS NOT DOUBTED THE PURCHASE PRICE OF THE SHARES IN THE EARLIER YEAR. (I) REVENUE HAS ALSO NOT BROUGHT ANY MATERIAL ON RE CORD TO PROVE THAT THE PRICE AT WHICH THE SHARES HAVE BEEN SOLD D URING THE YEAR ARE LESS THAN THE FAIR MARKET PRICE. (J) INSERTION OF SECTION 56(2)(VIIA) HAS BEEN MADE BY FINANCE ACT, 2010 W.E.F. 1.6.2010 FOR THE CALCULATION OF DEEMED INCOME IF SALE IS NOT APPLICABLE TO ASSESSEE AS IT IS NOT RETROSPECTI VE IN NATURE. ITA NO. 1632/AHD/2012 ASST. YEAR 2009-10 21 (K) THERE IS NO IOTA OF EVIDENCE TO PROVE THAT THE IMPUGNED TRANSACTIONS GIVING RISE TO SHORT TERM CAPITAL LOSS OF RS.1,75,50,000/- WAS A COLOURABLE DEVICE AND ENTIRE ARRANGEMENT WAS A PAPER ARRANGEMENT. (L) ASSESSEE HAS MERELY MADE LEGITIMATE TAX PLANNIN G WITHIN THE FRAME WORK OF LAW. 22. IN VIEW OF OUR ABOVE OBSERVATIONS AND RESPECTFU LLY FOLLOWING THE JUDGMENT OF HON. JURISDICTIONAL HIGH COURT IN THE CASE OF ACIT V. BIRAJ INVESTMENT PVT. LTD. (SUPRA) AND THE DECISION OF THE CO-ORDINATE BENCH IN THE CASE OF HASMUKH M. PATEL VS. ACIT (SUP RA) WE ARE OF THE VIEW THAT ASSESSEE HAS RIGHTLY CLAIMED SHORT TE RM CAPITAL LOSS OF RS.1,75,50,000/- WHICH IS ELIGIBLE TO BE SET OFF AG AINST LONG TERM CAPITAL GAIN AND THE IMPUGNED TRANSACTION IS NEITHE R SHAM NOR SPECULATIVE IN NATURE. WE ACCORDINGLY SET ASIDE THE ORDER OF LD. CIT(A) AND ALLOW THIS GROUND OF ASSESSEE. 23. GROUND NO.3 READS AS UNDER :- 3 THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) HAS NOT ALLOWED INTEREST EXPENSE OF RS. 9,18,134/- AS AGAINST INTER EST FREE ADVANCE TO GROUP COMPANY. 24. AS REGARDS GROUND NO.3, DURING THE COURSE OF AS SESSMENT PROCEEDINGS LD. ASSESSING OFFICER OBSERVED THAT ASS ESSEE HAS CLAIMED DEDUCTION OF UNSECURED LOAN FROM SURAJ IMPE X PVT. LTD. OF RS.400.50 LACS AND ALSO PAID INTEREST OF RS.9,18,13 4/-. LD. ASSESSING ITA NO. 1632/AHD/2012 ASST. YEAR 2009-10 22 OFFICER ALSO OBSERVED THAT ASSESSEE HAS GRANTED INT EREST FREE LOAN AMOUNTING TO RS.2096.85 LACS TO SURAJ STAINLESS LTD . FROM WHICH NO INTEREST WAS CHARGED DURING THE YEAR. IN THE BACK D ROP OF THIS OBSERVATION, LD. ASSESSING OFFICER WAS OF THE VIEW THAT THE INTEREST PAID BY ASSESSEE OF RS.9,18,134/- SHOULD BE DISALLO WED U/S 36(1)(III) OF THE ACT. WHEN THE MATTER CAME UP BEFORE LD. CIT( A) DISMISSED THE GROUND OF ASSESSEE BY OBSERVING AS FOLLOWS :- 4.3 DECISION: I HAVE CAREFULLY PERUSED THE ASSESSMENT ORDER AND T HE SUBMISSIONS GIVEN BY THE APPELLANT. THE CLAIM OF THE APPELLANT THAT IT HAD S UFFICIENT INTEREST FREE FUNDS FOR MAKING THE INTEREST FREE ADVANCES IS NOT SUPPORTED BY FACTS. THE INTEREST FREE FUNDS ARE INVESTED IN VARIOUS LONG TERM INVESTMENT AND OTHER LOANS THAT HAVE BEEN GIVEN BY THE APPELLANT, IT IS NOTED THAT APPEL LANT HAS TAKEN LOAN FROM PUNJAB NATIONAL BANK IN THE FORM OF CURRENT ACCOUNT WHICH IS APPARENTLY FOR RUNNING DAY TO DAY AFFAIRS OF THE COMPANY AND, THEREFORE, THERE IS NO AVAILABILITY OF INTEREST FREE FUNDS WITH THE APPELLANT. THE CLAIM OF THE APP ELLANT THAT BENEFIT OF DOUBT OF UTILIZING THE OWN FUNDS FROM THE COMMON POOL ACCOUN T SHOULD BE GIVEN TO THE APPELLANT IS ALSO ACCEPTABLE AS THE BALANCE SHEET O F THE APPELLANT CLEARLY SHOW THAT THE FUNDS ARE INVESTED ELSEWHERE AND THERE IS NO BENEFIT OF DOUBT. AS MENTIONED ABOVE, THE APPELLANT HAS TAKEN A LOAN FRO M PUNJAB NATIONAL BANK FOR RUNNING DAY TO DAY AFFAIRS IN THE FORM OF CURRENT A CCOUNT, AND THEREFORE, THE RECEIPTS OUT OF SALE PROCEEDS ALSO CANNOT BE CONSID ERED AS INTEREST FREE. THE APPELLANT HAS NOT BEEN ABLE TO CLEARLY PROVE THE NE XUS BETWEEN THE INTEREST FREE FUNDS AND THE BORROWINGS AND ACCORDINGLY, THE DISAL LOWANCE MADE BY THE A . O. IS UPHELD AND THE GROUND OF APPEAL IS DISMISSED. 25. AGGRIEVED, ASSESSEE IS NOW IN APPEAL BEFORE THE TRIBUNAL. 26. LD. AR SUBMITTED THAT AS REGARDS NON CHARGING O F INTEREST ON ADVANCES OF RS. 20.86 CRORE TO M/S. SURAJ STAINLESS LIMITED, REFERRED TO THE FINANCIAL STATEMENT OF THE COMPANY TO CLARIF Y THAT THE COMPANY HAS INTEREST FREE FUND OF RS. 19,31 CRORE AT THE TI ME OF ADVANCES AND THE COMPANY WAS GOING TO BE MERGED WITH M/S. SURAJ STAINLESS ITA NO. 1632/AHD/2012 ASST. YEAR 2009-10 23 LIMITED FROM 01.04.2009 AS PER SCHEME OF AMALGAMATI ON AND THEREFORE THE MANAGEMENT HAS NOT CHARGED INTEREST ON SUCH ADVANCES. LD. AR FURTHER SUBMITTED THAT NON-CHARGIN G OF INTEREST ON LOANS CANNOT BY ITSELF BE A SUFFICIENT GROUND FOR D ISALLOWING INTEREST PAID ON LOANS TAKEN BY IT IN THE ABSENCE OF ANY NEX US BETWEEN THE BORROWED CAPITAL OR INTEREST FREE ADVANCES. LD. AR ALSO SUBMITTED THAT THERE ARE NUMBER OF VARIOUS JUDICIAL PRONOUNCE MENTS THAT IF THERE ARE SUFFICIENT FUNDS ON THE PARTICULAR DATE TO COVE R THE ADVANCE MERELY BECAUSE ASSESSEE HAS ALSO TAKEN SOME LOAN IT CANNOT BE ATTRIBUTABLE THAT THE INTEREST BEARING FUNDS ARE DI VERTED FOR NON- BUSINESS PURPOSES. REFERENCE WAS ALSO MADE TO SURAJ STAINLESS LTD. TO WHICH ADVANCE HAS BEEN MADE ON VARIOUS DATES OUT OF SURPLUS FUNDS, REALIZATION FROM SHARE TRADING OR RECOVERY O F OLD ADVANCE GIVEN. RELIANCE IS PLACED ON THE DECISION OF THE CO -ORDINATE BENCH IN THE CASE OF TORRENT FINANCIAL VS. ACIT, (2001) 73 T TJ 624 (AHD.). 27. ON THE OTHER HAND, LD. DR VEHEMENTLY ARGUED AND SUPPORTED THE ORDERS OF LOWER AUTHORITIES. 28. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIAL PLACED ON RECORD. THROUGH THIS GROUND ASSESSEE HAS ASSAILED THE ORDER OF LD. CIT(A) CONFIRMING LD. ASSESSING OFFICE RS ACTION OF DISALLOWING INTEREST PAID ON UNSECURED LOAN OF RS.9 ,18,134/-. WE OBSERVE THAT ASSESSEE HAS TAKEN UNSECURED LOAN FROM M/S SURAJ IMPEX PVT. LTD. OF RS.400.05 LACS ON WHICH INTERE ST OF RS.9,18,134/- WAS PAID. DURING THE YEAR INTEREST FREE LOAN WAS GR ANTED TO SURAJ STAINLESS LTD. AT RS.2096.85 LACS. FURTHER ASSESSEE COMPANY WAS ITA NO. 1632/AHD/2012 ASST. YEAR 2009-10 24 GOING TO BE MERGED WITH M/S SURAJ STAINLESS LTD. WI TH EFFECT FROM 1.4.2009 WHICH IS EVIDENCED BY THE ORDER OF HON. GU JARAT HIGH COURT DATED 5.8.2010 PLACED AT PAGES 65 TO 82 OF THE PAPE R BOOK EVIDENCING THAT THERE WAS A MERGER OF SURAJ STAINLE SS LTD. WITH SURAJ LTD. 29. IN THE NORMAL COURSE INTEREST EXPENDITURE IS DI SALLOWED IF INTEREST BEARING FUNDS ARE DIVERTED TO INTEREST FRE E ADVANCES. IN THE PRESENT CASE LD. ASSESSING OFFICER SEEMS TO HAVE TA KEN A GENERAL VIEW FROM THE BALANCE SHEET OF THE ASSESSEE COMPANY WHEREIN ON THE LIABILITY SIDE THERE WAS UNSECURED LOAN AND ON THE ASSET SIDE THERE WAS INTEREST FREE ADVANCE TO M/S SURAJ STAINLESS LT D. NO EFFORTS HAVE BEEN MADE BY REVENUE TO PROVE THAT THERE IS A NEXUS BETWEEN THE INTEREST BEARING FUNDS WITH INTEREST FREE ADVANCES. ON THE CONTRARY ASSESSEE HAS SUBMITTED SUFFICIENT DETAILS DURING TH E COURSE OF ASSESSMENT PROCEEDINGS TO SUPPORT ITS CLAIM THAT TH E FUNDS ADVANCED TO SURAJ STAINLESS LTD. HAVE TAKEN PLACE ON VARIOUS DATES DURING THE YEAR FROM FUNDS FROM VARIOUS SOURCES OTHER THAN TH E INTEREST BEARING FUNDS. THIS FACT IS ALSO NOT DISPUTED THAT ASSESSEE WAS HAVING SUFFICIENT INTEREST FREE FUNDS AT ITS DISPOSAL IN T HE FORM OF RESERVE AND SURPLUS OF RS.19.84 CRORES AS WELL AS INTEREST FREE FUNDS OF RS.2.84 CRORES AGGREGATING TO RS.22.12 CRORES. FURTHER REFE RRING TO THE DECISION OF THE CO-ORDINATE BENCH IN THE CASE OF TO RRENT FINANCIERS LTD. VS. ACIT (SUPRA) WHEREIN THE CO-ORDINATE BENCH HAS OBSERVED AS UNDER :- ITA NO. 1632/AHD/2012 ASST. YEAR 2009-10 25 HELD: ENTIRE INTEREST-FREE FUNDS AVAILABLE WITH THE ASSES SEE IS TO BE CONSIDERED. THE ENTIRE INTEREST-FREE FUNDS INCLUDE OWNERS OWN CAPI TAL, ACCUMULATED PROFITS AND OTHER INTEREST-FREE CREDITORS AND LOANS, IF TOTAL I NTEREST-FREE ADVANCES INCLUDING DEBIT BALANCES OF PARTNERS DO NOT EXCEED THE TOTAL INTEREST-FREE FUNDS AVAILABLE WITH THE ASSESSEE, NO INTEREST IS DISALLOWABLE ON A CCOUNT OF UTILISATION OF FUND FOR NON-BUSINESS PURPOSES AND IF IT EXCEEDS, THE PROPOR TIONATE DISALLOWANCE CAN BE MADE. THE AO IS REQUIRED TO RECALCULATE THE FIGURES OF DISALLOWANCE OF INTEREST PAID ON BORROWED FUNDS, THEREFORE, THE ORDER OF CIT (A) ON THIS ISSUE IS SET ASIDE AND THE ISSUE IS RESTORED BACK TO THE FILE OF AO FO R THE LIMITED PURPOSE TO RECALCULATE DISALLOWANCE OF INTEREST PAID ON BORROW ED FUNDS, IF ANY, IN ACCORDANCE WITH THE ABOVE OBSERVATIONS AND AS PER PROVISIONS O F IT ACT. CIT VS. TINGRI TEA CO. LTD. (1971) 79 ITR 294 (CAL) RELIED ON. 30. RESPECTFULLY FOLLOWING THE DECISION OF THE CO-O RDINATE BENCH IN THE ABOVE REFERRED CASE WE FIND THAT LD. ASSESSING OFFICER HAS MADE AN ESTIMATED ADDITION WITHOUT PROVING THE NEXUS BET WEEN THE INTEREST BEARING FUNDS AND INTEREST FREE ADVANCES WHEREAS AS SESSEE HAD SUFFICIENTLY DEMONSTRATED TO HAVE ENOUGH INTEREST F REE RESERVE AND SURPLUS AND INTEREST FREE UNSECURED LOAN TO COVER U P THE INTEREST FREE ADVANCES ALONG WITH ORDER OF HON. GUJARAT HIGH COUR T ABOUT MERGER OF ASSESSEE WITH SURAJ STAINLESS LTD. TO WHOM INTER EST FREE ADVANCES WERE GIVEN. WE, THEREFORE, SET ASIDE THE ORDER OF L D. CIT(A) AND ALLOW THIS GROUND OF ASSESSEE. 31. GROUND NO.4 READS AS UNDER :- 4. THE LD. CIT(A) HAS NOT CONSIDERED RENT EXP. OF M UMBAI OFFICE AS A BUSINESS EXPENSE. 32. AS REGARDS GROUND NO.4, DURING THE YEAR UNDER A PPEAL ASSESSEE DEBITED RS.9,00,000/- ON ACCOUNT OF RENT F OR OCCUPYING GUEST HOUSE AT MUMBAI. NO SUCH TYPE OF RENT EXPENSE WAS CLAIMED IN EARLIER YEARS. GENUINENESS OF THIS EXPENDITURE W AS DOUBTED BY LD. ITA NO. 1632/AHD/2012 ASST. YEAR 2009-10 26 ASSESSING OFFICER TO WHICH ASSESSEE REPLIED ON 21.7 .2011 ALONG WITH COPY OF RENT AGREEMENT TOWARDS OCCUPYING GUEST HOUS E AT MUMBAI FOR THE PURPOSE OF FREQUENT VISIT OF DIRECTORS FOR OFFICE PURPOSES. HOWEVER, THE REPLY OF ASSESSEE WAS NOT ACCEPTABLE T O LD. ASSESSING OFFICER AS THE ASSESSEE HAD BEEN DEALING IN SHARES FOR LAST MANY YEARS WHICH WAS ON LINE AND THEREFORE, PHYSICAL VIS IT OF DIRECTORS TO MUMBAI WAS NOT FOR BUSINESS PURPOSES AND ACCORDINGL Y HE DISALLOWED THE RENT EXPENSES. WHEN THE MATTER CAME UP BEFORE LD. CIT(A) THE GROUND OF THE ASSESSEE WAS DISALLOWED BY OBSERVING AS FOLLOWS :- 5.3 DECISION: I HAVE CAREFULLY PERUSED THE ASSESSMENT ORDER AND T HE SUBMISSIONS GIVEN BY THE APPELLANT. THE A.O HAS DISALLOWED THE RENT PAID ON HIRING OF THE GUEST HOUSE AS THERE WAS NO BUSINESS JUSTIFICATION FOR TH E SAME. THE APPELLANT HAS SUBMITTED THAT THE DIRECTORS FREQUENTLY VISIT MUMBA I FOR OFFICE PURPOSE AND THEY USE THE FLAT FOR MEETING ETC. AND, THEREFORE, RENT SHOULD BE ALLOWED. I AM NOT IN AGREEMENT WITH THE APPELLANT'S SUBMISSION, N O NEW FACT HAS BEEN BROUGHT ON RECORD TO SHOW THAT THE APPELLANT HAS IN FACT USED THE SAME FOR THE PURPOSE OF BUSINESS. THE A. O. HAS GIVEN A FINDING THAT THE APPELLANT HAD BEEN DEALING IN SHARES FOR LAST SO MANY YEARS AND T HE BUSINESS WAS BEING DONE ON LINE AND, THEREFORE, THERE WAS NO JUSTIFIAB LE PURPOSE. THE APPELLANT HAS ALSO NOT GIVEN ANY EVIDENCE THAT THE GUEST HOUS E OR THE FLAT HAS IN FACT BEEN USED FOR THE PURPOSE OF BUSINESS. IN ABSENCE O F ANY SUCH JUSTIFICATION, I AM CONSTRAINED TO UPHOLD THE DISALLOWANCE MADE BY T HE A. O. THE GROUND OF APPEAL IS ACCORDINGLY DISMISSED. 33. AGGRIEVED, ASSESSEE IS NOW IN APPEAL BEFORE THE TRIBUNAL. 34. LD. AR SUBMITTED THAT ASSESSEE IS A LIMITED COM PANY AND IS REGULARLY ENGAGED IN THE BUSINESS. THE DIRECTORS OF THE COMPANY USED TO VISIT MUMBAI FREQUENTLY FOR OFFICE PURPOSE AND IN ORDER TO ITA NO. 1632/AHD/2012 ASST. YEAR 2009-10 27 REDUCE THE HOTEL EXPENSES IT WAS DECIDED IN THE INT EREST OF THE COMPANY TO HIRE A GUEST HOUSE AT MUMBAI SO THAT AS AND WHEN THE DIRECTORS VISIT MUMBAI THEY CAN STAY THEREIN. REGIS TERED DEED OF LEAVE AND LICENCE WAS ENTERED ON 19.11.2008, TDS WAS DEDU CTED ON THE PAYMENT MADE AND ALL TRANSACTIONS HAVE BEEN ENTERED THROUGH PROPER BANKING CHANNEL. LD. AR REFERRED AND RELIED ON THE FOLLOWING DECISIONS :- 1, CIT VS. SOUTH INDIA VICOSE LTD. (2003) 259 ITR 1 07 (MAD) 2. CIT V. AHMEDABAD MFG. AND CALICO PRINTING CO. LT D. [1992] 197 ITR 538 (GUJ). 35. LD. DR VEHEMENTLY ARGUED AND SUPPORTED THE ORDE RS OF LOWER AUTHORITIES. 36. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIAL PLACED BEFORE US. THROUGH THIS GROUND ASSESSEE HAS CHALLENGED THE ORDER OF LD. CIT(A) CONFIRMING THE ACTION OF LD. AS SESSING OFFICER DISALLOWING RENT EXPENSES OF RS.9,00,000/-. WE OBSE RVE THAT FOR THE FIRST TIME DURING THE YEAR UNDER APPEAL ASSESSEE HA S CLAIMED RENT EXPENSES OF RS.9,00,000/- TOWARDS HIRING OF GUEST H OUSE AT MUMBAI FOR THE STAY OF DIRECTORS FREQUENTLY VISITING MUMBA I FOR OFFICE PURPOSES. WE FURTHER OBSERVE THAT ASSESSEE HAS ENTERED INTO L EAVE AND LICENCE AGREEMENT ON 19.11.2008 WITH SHRI PANKIN LAXMICHAND SHAH AND SHRI KUNAL T. SHAH FOR TAKING TWO FLATS ON LEASE AT MONTHLY RENT OF RS.2,25,000/-. THERE IS NO DISPUTE TO THE GENUINENE SS OF THE TRANSACTION WITH REGARD TO THE FLATS TAKEN ON LEASE , RENT PAID AFTER TDS ITA NO. 1632/AHD/2012 ASST. YEAR 2009-10 28 AND THE IDENTITY OF THE LANDLORDS. THE ONLY DISPUTE RAISED BY ASSESSING OFFICER IS WITH REGARD TO HIS OBSERVATION THAT THE ASSESSEE HAS NEVER CLAIMED SUCH EXPENDITURE IN PAST AND AS T HE ASSESSEE IS DEALING IN SHARE TRANSACTIONS WHICH DEALT WITH ON-L INE THERE IS NO NEED TO TAKE A LEASE OF GUEST HOUSE IN MUMBAI. WE ARE UN ABLE TO UNDERSTAND THAT HOW THE MODUS OPERANDI OF DOING BUS INESS CAN BE CONTROLLED OR CHECKED BY THE ASSESSING OFFICER. ASS ESSEE IS A LIMITED COMPANY AND IS ENGAGED IN THE BUSINESS REGULARLY SI NCE LAST MANY YEARS. BOOKS OF ACCOUNTS ARE AUDITED, REGULAR FINAN CIAL STATEMENTS ARE FILED WITH THE INCOME-TAX DEPARTMENT AS WELL AS REGISTRAR OF COMPANIES, RENT TRANSACTIONS ARE PROPERLY EVIDENCED BY REGISTERED AGREEMENT ALONG WITH PAYMENT MADE BY CHEQUES AND TD S. 37. THERE IS FAIR POSSIBILITY OF SITUATION WHEN A C OMPANY PLANS ITS FUTURE BUSINESS TREND AND MAY HAVE TO EXPLORE VARIO US AVENUES WITH RELATION THERETO. IT SEEMS THAT ASSESSEE WITH THE F ORE-SIGHTEDNESS AND IN ORDER TO IMPROVE AND EXPAND BUSINESS AND ALSO T O SAVE EXTRA HOTEL CHARGES THOUGHT IT AMICABLE TO TAKE FLATS ON LEASE IN MUMBAI. IN THE GIVEN FACTS AND CIRCUMSTANCES OF THE CASE AND IN AB SENCE OF ANY CONTRARY REASONS BROUGHT ON RECORD BY THE REVENUE A GAINST THE IMPUGNED EXPENDITURE BOOKED BY THE ASSESSEE EXCEPT A CASUAL APPROACH, WE ARE INCLINED TO BELIEVE THAT ASSESSEE HAS CLAIMED GENUINE EXPENDITURE OF RENT OF RS.9,00,000/-. WE SE T ASIDE THE ORDER OF LD. CIT(A) AND ALLOW THIS GROUND. 38. GROUND NO.4 & 5 ARE OF GENERAL NATURE, WHICH NE ED NO ADJUDICATION. ITA NO. 1632/AHD/2012 ASST. YEAR 2009-10 29 39. IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOWE D. ORDER PRONOUNCED IN THE OPEN COURT ON 9 TH JANUARY, 2017 SD/- SD/- (R.P.TOLANI) JUDICIAL MEMBER (MANISH BORAD) ACCOUNTANT MEMBER DATED 09/01/2017 MAHATA/- COPY OF THE ORDER FORWARDED TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT CONCERNED 4. THE CIT(A) CONCERNED 5. THE DR, ITAT, AHMEDABAD 6. GUARD FILE BY ORDER ASST. REGISTRAR, ITAT, AHMEDABAD 1. DATE OF DICTATION: 5/01/2017 2. DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE T HE DICTATING MEMBER: 06/01/2017 OTHER MEMBER: 3. DATE ON WHICH APPROVED DRAFT COMES TO THE SR. P. S./P.S.: 4. DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE TH E DICTATING MEMBER FOR PRONOUNCEMENT: __________ 5. DATE ON WHICH THE FAIR ORDER COMES BACK TO THE S R. P.S./P.S.: 6. DATE ON WHICH THE FILE GOES TO THE BENCH CLERK: 10.01.17 7. DATE ON WHICH THE FILE GOES TO THE HEAD CLERK: 8. THE DATE ON WHICH THE FILE GOES TO THE ASSISTANT REGISTRAR FOR SIGNATURE ON THE ORDER: 9. DATE OF DESPATCH OF THE ORDER: