LAKSHMIWADI MINES & MINERALS PVT. LTD., MUMBAI V. DCIT Circle 2(2), MUMBAI

ITA 4431/MUM/2004

• Counselvise Citation: [2019] 118 COUNSELVISE.COM (IT) 3627 (ITAT-MUMBAI)
• Duration Of Justice: 14 year(s) 8 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-02-2019
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: H
• Assessment Year: 2000-2001
• Appeal Filed On: 28-05-2004
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: UDAYA BHASKAR JAKKA
• Assessee Lawyers: FIROZE ANDHYARUJINA
• Keywords: Capital asset; Business income; Share purchase agreement; Additional evidence; Question of law; Wholly owned subsidiary; Avoidance of tax; Valuation report; Commercial expediency
• Section: 80HHC; 250

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL H , BENCH MUMBAI BEFORE SHRI M. BALAGANESH , AM & SHRI RAM LAL NEGI , JM ITA NO. 4431/ MUM/20 04 ( ASSESSMENT YEAR : 2000 - 2001 ) M/S. LAXMIWADI MINES & MINERALS PVT LTD (FORMERLY LAXMIWADI SUGAR FACTORY LTD) 20, YU SUF BUILDING, 43 - 45, M.G.ROAD, FORT, MUMBAI 400 001 VS. DY. COMMISSIONER OF INCOME TAX 5 TH FLOOR, AAKAYAR BHAVAN M.K.ROAD, MUMBAI 400 020 PAN/GIR NO. AAACN3479P ( APPELLANT ) .. ( RESPONDENT ) ASSESSEE BY SHRI FIROZE ANDHYARUJINA REVENUE BY SHR I UDAYA BHASKAR JAKKA DATE OF HEARING 30 / 01 /201 9 DATE OF PRONOUNCEMENT 20 / 02 /201 9 / O R D E R PER M. BALAGANESH (A.M) : THIS IS AN APPEAL FILED BY THE ASSESSEE DIRECTED AGAINST THE ORDER OF COMMISSIONER OF INCOME TAX (APPEALS) II, [HEREINAFTER REFERRED TO AS THE LD CITA] , MUMBAI DATED 26/03/2004 FOR A.Y.2000 - 01 IN THE MATTER OF ORDER PASSED U/S.143(3) OF THE INCOME TAX ACT, 1961. 2. THE ONLY ISSUE TO BE DECIDED IN THIS APPEAL IS AS TO WHETHER THE LD CITA WAS JUSTIFIED IN CONFIRMING THE DISALLOWANCE OF CAPITAL LOSS ON SALE OF 560 PREFERENCE SHARES OF M/S SOMAIYA ORGANICS (INDIA) LTD [ IN SHORT SOIL] IN THE FACTS AND CIRCUMSTANCES OF THE CASE. THE INTER CONNECTED ISSUE THEREON IS AS TO WHETHER THE LD CITA CONSEQUENT TO CONFIRMING THE DISALLOWANCE OF AFORESAID CAPITAL LOSS WAS JUSTIFIED IN NOT GRANTING SET OFF ITA NO. 4431/MUM/2004 M/S. LAXMIWADI MINES & MINERALS PVT. LTD., 2 WITH LONG TERM CAPITAL GAINS ON SALE OF SHARES OF BAJAJ AUTO LTD IN THE FACTS AND CIRCUMSTANCES OF THE CASE. 3. THE BRIEF FACTS OF THIS ISSUE ARE THAT THE ASSESSEE IS A COMPANY AND HAD FILED ITS RETURN OF INCOME FOR THE ASST YEAR 2000 - 01 ON 30.11.2000 DECLARING TOTAL INCOME OF RS 2,35,79,840/ - . THE LD AO OBSERVED FROM THE DETAILS PROVIDED BY THE ASSESSEE DURING THE COURSE OF ASSESSMENT PROCEEDINGS THAT THE ASSESSEE HAD RECEIVE D SALE PROCEEDS OF RS 7.73 CRORES FROM SALE OF EQUITY SHARES OF BAJAJ AUTO LTD AND HAD OFFERED LONG TERM CAPITAL GAINS THEREON. THE LD AO ALSO OBSERVED THAT THE ASSESSEE HAD SET OFF THE CAPITAL LOSS ARISING FROM SALE OF 560 PREFERENCE SHARES OF M/S SOMAIY A ORGANICS (INDIA) LTD TO THE TUNE OF RS 5.18 CRORES WITH THE LONG TERM CAPITAL GAINS ON SALE OF SHARES OF BAJAJ AUTO LTD OF RS 7.73 CRORES. THE LD AO OBSERVED THAT THE ASSESSEE HAD DULY PAID LONG TERM CAPITAL GAINS TAX ON THE DIFFERENTIAL GAIN OF RS 2.55 CRORES (7.73 - 5.18). THE LD AO SOUGHT TO EXAMINE THE VERACITY OF THE CLAIM OF CAPITAL LOSS ON SALE OF 560 PREFERENCE SHARES OF SOIL AND ACCORDINGLY CALLED FOR THE REQUISITE DETAILS. FROM THE DETAILS FILED BY THE ASSESSEE, THE LD AO OBSERVED THAT THE ASSE SSEE HAD PURCHASED 560 PREFERENCE SHARES OF SOIL, WHICH IS A GROUP COMPANY AND ALSO A SICK INDUSTRIAL COMPANY, AT A PRICE OF RS 100000 PER SHARE AND ACCORDINGLY PAID A SUM OF RS 5,60,00,000/ - AS PURCHASE CONSIDERATION OF SHARES. THE SAID 560 PREFERENCE S HARES WERE SOLD BY THE ASSESSEE ON 28.3.2000 TO A THIRD PARTY VIZ. M/S MORGANITE TRADING COMPANY FOR RS 7500 PER SHARE AND CONSIDERATION RECEIVED THEREON WAS RS 42,00,000/ - . THIS RESULTED IN A CAPITAL LOSS OF RS 5,18,00,000/ - TO THE ASSESSEE WHICH WAS SET OFF BY THE ASSESSEE WITH THE LONG TERM CAPITAL GAINS DERIVED ON SALE OF SHARES OF BAJAJ AUTO LTD AS STATED SUPRA. THE LD AO OBSERVED THAT FROM THE BALANCE SHEET OF SOIL, THERE WAS NO MAJOR DEVIATION OR CHANGE IN THE MANAGEMENT PATTERN, NATURE OF BUSINES S OR PROFITABILITY WHICH COULD HAVE ITA NO. 4431/MUM/2004 M/S. LAXMIWADI MINES & MINERALS PVT. LTD., 3 TRIGGERED THE FALL IN VALUE OF THE SHARES CLAIMED, ESPECIALLY WHEN IT IS A WELL KNOWN FACT THAT EVEN THE STOCK MARKET CONDITIONS WERE FAIRLY CONDUCIVE IN THE RELEVANT PERIOD. HE FURTHER PLACED RELIANCE ON THE NOTE NO. 4 REFLECTED IN THE AUDITED ACCOUNTS WITH REGARD TO THE EARLIER PREFERENCE SHARES THAT HAD BECOME DUE FOR REDEMPTION ON 13.1.1984, WHICH WAS NOT REDEEMED BY M/S SOIL AND IN LIEU OF WHICH NON CONVERTIBLE SECURED DEBENTURES CARRYING INTEREST OF 15% PER ANNUM WE RE ISSUED BY THE SAID COMPANY AND THAT THE INTEREST ON SUCH DEBENTURES WERE ALSO NOT PROVIDED IN THE ACCOUNTS OF SOIL FOR A CERTAIN PERIOD, PENDING ORDERS FROM HONBLE ALLAHABAD HIGH COURT. THE SAID NOTE NO. 4 IN THE ANNUAL REPORT OF M/S SOIL ALSO STATED T HAT PENDING COMPLETION OF THE FORMALITIES, PAYMENT ON ACCOUNT AGGREGATING TO RS 129.06 LACS OF THE PRINCIPAL AMOUNT PAYABLE UNDER THE PROPOSED SCHEME WAS MADE TO THE PREFERENCE SHAREHOLDERS OF M/S SOIL AND THE SAME HAS BEEN INCLUDED IN ADVANCES RECOVERABL E IN CASH OR KIND OR FOR VALUE TO BE RECEIVED UNDER LOANS AND ADVANCES IN THE BALANCE SHEET. BASED ON THESE OBSERVATIONS, THE LD AO CONCLUDED THAT THE ASSESSEE HAD MERELY BOOKED CAPITAL LOSS ON SALE OF 560 PREFERENCE SHARES OF M/S SOIL TO SET OFF AGAINST THE LONG TERM CAPITAL GAINS ON SALE OF SHARES OF BAJAJ AUTO LTD AND TREATED THE TRANSACTIONS OF PURCHASE OF 560 PREFERENCE SHARES AS A BOGUS TRANSACTION. ACCORDINGLY HE STATED THAT THE CAPITAL LOSS SHOWN BY THE ASSESSEE COMPANY IS TOTALLY A COLOURABLE TRA NSACTION TO REDUCE THE INCIDENCE OF TAX LIABILITY OF LONG TERM CAPITAL GAINS ON SALE OF SHARES OF BAJAJ AUTO LTD. WITH THESE OBSERVATIONS, THE LD AO PROCEEDED TO DISALLOW THE CAPITAL LOSS OF RS 5.18 CRORES IN THE ASSESSMENT. 4. THE ASSESSEE BEFORE THE LD CITA REITERATED THE FACTS AS UNDER: - A) THE ASSESSEE INVESTED IN 10% REDEEMABLE CUMULATIVE PREFERENCE SHARES OF M/S SOIL , WHICH IS A GROUP CONCERN, COMPRISING OF 560 SHARES ITA NO. 4431/MUM/2004 M/S. LAXMIWADI MINES & MINERALS PVT. LTD., 4 OF RS 100000 EACH IN ASST YEAR 1999 - 2000. IT STATED THAT 250 PREFERENCE SHARES WERE INVESTED IN JANUARY 1999 AND 310 PREFERENCE SHARES WERE BOUGHT IN MARCH 1999. EACH PREFERENCE SHARE HAD FACE VALUE OF RS 100000/ - EACH. THE SAID PREFERENCE SHARES WERE SOLD TO M/S MORGANITE INDIA LTD AT RS 7500 PER SHARE IN ASST YEAR 2000 - 01 RESULT ING IN CAPITAL LOSS OF RS 5.18 CRORES. B) M/S SOIL IS A GROUP COMPANY OF THE ASSESSEE COMPANY. AS ON 1.4.1998, THE SHARE CAPITAL OF M/S SOIL WAS RS 179.97 LACS AND RESERVES AND SURPLUS WAS RS 338.64 LACS AGGREGATING TO RS 518.63 LACS. FOR THE YEAR ENDED 31.3.1999, THE PROFITABILITY OF M/S SOIL WAS ADVERSELY AFFECTED DUE TO TORRENTIAL RAINS AND FLOODS IN THE AREA IN WHICH M/S SOILS DISTILLERY WAS SITUATED WHICH RESULTED IN THE DISTILLERY HAVING TO SHUT DOWN FOR MORE THAN 60 DAYS AND FURTHER SHUT DOWN OF 48 DAYS DUE TO AGITATION BY THE LABOUR IN THE FACTORY. THE DISTILLERY COULD WORK ONLY AT 38.1% CAPACITY. AS A RESULT, M/S SOIL SUFFERED A LOSS OF APPROXIMATELY RS 10.74 CRORES FOR THE YEAR ENDED 31.3.1999 RESULTING IN EROSION OF NET WORTH OF M/S SOIL AND THEREBY BEING TREATED AS A SICK INDUSTRIAL COMPANY UNDER SECTION 3(1)(O) OF SICK INDUSTRIAL COMPANIES (SPECIAL PROVISIONS) ACT, 1985. C) IN ORDER TO PROTECT THE GROUP COMPANY I.E M/S SOIL FROM BEING DECLARED AS A SICK INDUSTRIAL COMPANY, IT WAS FELT THA T THE SHARE CAPITAL OF M/S SOIL BE INCREASED AND ACCORDINGLY M/S SOIL ISSUED 1450 10% REDEEMABLE CUMULATIVE PREFERENCE SHARES OF RS 100000 EACH , OUT OF WHICH 560 REDEEMABLE PREFERENCE SHARES WERE SUBSCRIBED FOR BY THE ASSESSEE COMPANY, BEING A GROUP COMPA NY OF M/S SOIL. AS A RESULT THEREOF, SHARE CAPITAL AS ON 31.3.1999 OF M/S SOIL STOOD INCREASED TO RS 16.30 CRORES WHICH WAS MORE THAN THE DEBIT BALANCE IN PROFIT AND LOSS ACCOUNT OF RS 7.35 CRORES ON THAT DATE AND ACCORDINGLY IT WAS SAVED FROM THE RIGOURS OF BEING TREATED AS A SICK INDUSTRIAL COMPANY. ITA NO. 4431/MUM/2004 M/S. LAXMIWADI MINES & MINERALS PVT. LTD., 5 D) DURING THE PREVIOUS YEAR 1999 - 2000 RELEVANT TO ASST YEAR 2000 - 01, THE ASSESSEE WAS ABLE TO FIND A BUYER WHO WAS WILLING TO PURCHASE THE PREFERENCE SHARES OF M/S SOIL AND ACCORDINGLY NEGOTIATIONS ENSUED B ETWEEN THE PARTIES AND IT WAS FINALLY AGREED THAT THE SHARES BE TRANSFERRED AT A PRICE OF RS 7500 PER SHARE. ACCORDINGLY, THE ASSESSEE COMPANY SOLD 560 10% REDEEMABLE PREFERENCE SHARES FOR RS 7500 EACH TOTALING TO RS 42,00,000/ - TO M/S MORGANITE INDIA LTD IN ASST YEAR 2000 - 01 AND INCURRED CAPITAL LOSS OF RS 5,18,00,000/ - . E) THIS CAPITAL LOSS OF RS 5,18,00,000/ - WAS SOUGHT TO BE SET OFF BY THE ASSESSEE COMPANY WITH LONG TERM CAPITAL GAINS ON SALE OF SHARES OF BAJAJ AUTO LTD. THE ASSESSEE STATED THAT SHA RES OF BAJAJ AUTO LTD WERE SOLD IN VARIOUS TRANCHES FROM SEPT 1999 TO MARCH 2000 IN THE OPEN MARKET. THE PREFERENCE SHARES OF M/S SOIL WERE SOLD IN MARCH 2000 BY THE ASSESSEE COMPANY. F) IT WAS PLEADED THAT THE PURPOSE OF MAKING INVESTMENT IN PREFERENCE SHARES OF M/S SOIL WAS ONLY TO BAIL OUT M/S SOIL FROM THE CLUTCHES OF SICK INDUSTRIAL COMPANIES (SPECIAL PROVISIONS) ACT, 1985. G) AT THE TIME OF PURCHASE OF PREFERENCE SHARES OF M/S SOIL IN JANUARY AND MARCH 1999, THERE WAS NO INTENTION FOR THE ASSESSEE TO EXECUTE SALE OF SHARES OF BAJAJ AUTO LTD. ADMITTEDLY, THE SALE OF SHARES OF BAJAJ AUTO LTD HAD BEEN DONE IN VARIOUS TRANCHES COMMENCING FROM SEPT 1999 TO MARCH 2000. H) THE PREFERENCE SHARES HELD BY THE ASSESSEE COMPANY WERE ACTUALLY SOLD IN ASST YEA R 2000 - 01 TO M/S MORGANITE INDIA LTD WHICH IS ENGAGED IN FINANCE BUSINESS AFTER MUTUAL NEGOTIATIONS ON THE PRICING OF THE SHARES AT RS 7500 PER SHARE. THIS DEAL WAS STRUCK IN FURTHERANCE TO THE MAIN MOTIVE OF PROTECTING THE INTERESTS OF M/S SOIL AS ADEQUA TE FUNDING COULD BE MADE IN M/S SOIL BY M/S MORGANITE INDIA LTD (WHICH IS ENGAGED IN FINANCING BUSINESS) AS AND WHEN THE NEED ARISES. ITA NO. 4431/MUM/2004 M/S. LAXMIWADI MINES & MINERALS PVT. LTD., 6 I) IT WAS ARGUED THAT OTHER THAN MERE CONJECTURE, SUSPICION AND SURMISE, THE LD AO HAD NOT BROUGHT ON RECORD ANY EVID ENCE TO SHOW THAT THE ASSESSEE HAD CLAIMED AN ARTIFICIAL LOSS AND THE TRANSACTION WAS A MERE DEVICE TO EVADE TAX. J) WITH REGARD TO THE CONTENTION OF THE LD AO THAT NO BASIS OF VALUATION OF PREFERENCE SHARES WAS DISCLOSED BY THE ASSESSEE, IT WAS SUBMITTED THAT THE SALE PRICE OF RS 7500 PER PREFERENCE SHARE WAS BASED ON NEGOTIATIONS THAT ENSUED BETWEEN THE PARTIES (I.E ASSESSEE AND M/S MORGANITE INDIA LTD) WHICH WAS HIGHER THAN THE BREAK UP VALUE METHOD FOR DETERMINING THE VALUE OF PREFERENCE SHARES. THE ASSESSEE ALSO PLACED ON RECORD THE VALUATION REPORT OBTAINED FROM AN INDEPENDENT VALUER VALUING THE PREFERENCE SHARES AT RS 7200 PER SHARE AND THAT THE SALE WAS NEGOTIATED AT A PRICE THAN THAT QUOTED IN THE VALUATION REPORT. 5. THE LD CITA OBSERVED THAT M/S SOIL HAD ALREADY DEFAULTED IN REDEMPTION OF PREFERENCE SHARES ON AN EARLIER OCCASION AND HENCE THE ASSESSEE IS VERY WELL AWARE OF THE SAID DEFAULT. IN SUCH A SCENARIO, IT WOULD NOT BE PRUDENT ON THE PART OF THE ASSESSEE TO MAKE FURTHER INVESTMENT IN PREFERENCE SHARES OF M/S SOIL. HE OBSERVED THAT THIS IS NOTHING BUT THROWING GOOD MONEY FOR BAD MONEY. THOUGH THE ASSESSEE PLEADED THAT THE INVESTMENT IN PREFERENCE SHARES WAS MADE IN M/S SOIL IN ORDER TO ENABLE M/S SOIL TO GET OUT FROM THE RIGOURS OF SI CK INDUSTRIAL COMPANIES (SPECIAL PROVISIONS) ACT, 1985, NO SUCH MENTION WAS MADE IN THE BOARD RESOLUTION PASSED BY THE BOARD OF DIRECTORS. HENCE HE OBSERVED THAT THE DECISION OF THE ASSESSEE COMPANY TO SUBSCRIBE FOR PREFERENCE SHARES CANNOT BE CONSIDERE D AS BONAFIDE AND GENUINE. HE OBSERVED THAT THE ASSESSEE HAD NOT JUSTIFIED THE VALUATION OF PREFERENCE SHARES AT RS 100000 PER SHARE AT THE TIME OF INVESTMENT. THE LD CITA OBSERVED THAT THE VALUE OF PREFERENCE SHARES AS PER THE BREAK UP VALUE METHOD WAS ON LY RS 7200 PER SHARE AND THAT EVEN IN ASST YEAR 2000 - 01, ITA NO. 4431/MUM/2004 M/S. LAXMIWADI MINES & MINERALS PVT. LTD., 7 M/S SOIL HAD ISSUED 450 10% REDEEMABLE CUMULATIVE PREFERENCE SHARES OF RS 100000 EACH TOTALING TO RS 4,50,00,000/ - . THE LD CITA DISTINGUISHED THE VARIOUS CASE LAWS RELIED UPON BY THE ASSESSEE BEFOR E HIM AND HE PLACED RELIANCE ON THE CO - ORDINATE BENCH DECISION OF THIS TRIBUNAL IN THE CASE OF BOMBAY OIL INDUSTRIES LTD VS DCIT REPORTED IN 82 ITD 626 (MUMBAI ITAT). THE LD CITA ALSO PLACED RELIANCE ON SEVERAL OTHER DECISIONS AND OBSERVED THAT THE TRA NSACTIONS OF PURCHASE AND SALE OF PREFERENCE SHARES OF M/S SOIL BY THE ASSESSEE WAS NOT A BONAFIDE AND GENUINE TRANSACTION AND THEREFORE THE LOSS OF RS 5.18 CRORES RESULTING THEREFROM CANNOT BE ALLOWED TO BE SET OFF AGAINST LONG TERM CAPITAL GAINS ON SALE OF SHARES OF BAJAJ AUTO LTD. 6. AGGRIEVED, THE ASSESSEE IS IN APPEAL BEFORE US. 7. WE HAVE HEARD THE RIVAL SUBMISSIONS. IT IS NOT IN DISPUTE THAT M/S SOIL IS A LISTED ENTITY. IT IS WELL KNOWN FACT THAT ONLY THE EQUITY SHARES OF A LISTED ENTITY WOULD GET LISTED IN THE STOCK EXCHANGE AND NOT THE PREFERENCE SHARES. IT IS NOT IN DISPUTE THAT M/S SOIL IS A GROUP COMPANY OF THE ASSESSEE HAVING COMMON SHAREHOLDERS AND DIRECTORS. THE SHAREHOLDING PATTERN OF M/S SOIL IS AS UNDER: - NAME OF THE SHAREHOLDER NUMBER OF SHARES HELD K J SOMAIYA 500 S K SOMAIYA 20500 SAKARBEN N K SOMAIYA 500 SAMIR S SOMAIYA 50000 K J SOMAIYA HUF 20000 MAYADEVI S SOMAIYA 15000 OTHERS (147 SHAREHOLDERS) 1133500 ---- ---------------- 1240000 SHARES -------------------- * INCLUDES 11400 SHARES HELD BY THE ASSESSEE COMPANY ITA NO. 4431/MUM/2004 M/S. LAXMIWADI MINES & MINERALS PVT. LTD., 8 WE FIND THAT THE ASSESSEE HAD PLEADED THAT THE NET WORTH OF M/S SOIL HAD COMPLETELY ERODED DUE TO HUGE LOSS INCURRED FOR THE YEAR ENDED 31.3.1999 AND THAT M/S SOIL WOULD FALL WITHIN THE AMBIT AND CONTROL OF BOARD OF INDUSTRIAL AND FINANCIAL RECONSTRUCTION (BIFR IN SHORT). HENCE IT IS THE BOUNDEN DUTY ON THE PART OF THE ASSESSEE COMPANY AND ITS PROMOTERS TO RESCUE ITS GROUP COMPANY M/S SOIL FROM THE RIGOURS OF BEING DECLARED AS A SICK INDUSTRIAL COMPANY UNDER THE SICK INDUSTRIAL COMPANIES (SPECIAL PROVISIONS) ACT, 1985. THE NET WORTH OF M/S SOIL BEING ERODED IS QUITE EVIDENT FROM THE BALANCE SHEET OF M/S SOIL AS ON 31.3.1999 WHEREIN IT IS VERY CLEA R THAT BUT FOR THE INFUSION OF FUNDS BY THE ASSESSEE COMPANY IN THE FORM OF INVESTMENT IN PREFERENCE SHARES IN JANUARY AND MARCH 1999, M/S SOIL WOULD HAVE BEEN DECLARED AS A SICK INDUSTRIAL COMPANY U/S 3(1)(O) OF SICK INDUSTRIAL COMPANIES (SPECIAL PROVISIO NS) ACT, 1985 AND THAT THE STATUTORY AUDITORS OF M/S SOIL HAD TO REPORT THE SAME AS SUCH IN THEIR AUDIT REPORT AS PER THE MANDATE PROVIDED IN THE COMPANIES ACT, 1956 AND ITS RULES. HENCE WE ARE NOT INCLINED TO AGREE WITH THE OBSERVATION OF THE LD CITA THA T NO EVIDENCES WERE SUBMITTED BY THE ASSESSEE THAT THE NET WORTH HAD BEEN ERODED. THIS FACT IS APPARENT FROM THE FACE OF THE BALANCE SHEET OF M/S SOIL AS ON 31.3.1999. EVEN IF THE SAID COMPANY M/S SOIL IS DECLARED AS A SICK INDUSTRIAL COMPANY, THE BIFR WOULD PASS AN INTERIM ORDER DIRECTING THE PROMOTERS AND GROUP COMPANIES TO FIRST INFUSE SOME PORTION OF FUNDS AS EQUITY / PREFERENCE CAPITAL OR UNSECURED LOANS IN THE SICK COMPANY. THE ASSESSEE COMPANY IN THE INSTANT CASE HAD DONE IT BEFORE ANY DIRECTION S FROM A REGULATORY AUTHORITY AND ACCORDINGLY HAD INVESTED IN PREFERENCE SHARES OF M/S SOIL ON ITS OWN VOLITION TO PROTECT ITS GROUP COMPANY. THE SAID CONSCIOUS BUSINESS DECISION TO PROTECT THE INTERESTS OF THE GROUP COMPANY CANNOT BE QUESTIONED BY THE RE VENUE. WE ALSO FIND LOT OF FORCE IN THE ARGUMENT OF THE LD AR THAT IF THE PREFERENCE SHARES ARE ISSUED AT FACE VALUE OF RS 100000 EACH TO A GROUP COMPANY, THEN AT THE SAME ITA NO. 4431/MUM/2004 M/S. LAXMIWADI MINES & MINERALS PVT. LTD., 9 VALUE, M/S SOIL COULD RAISE FUNDS FROM OUTSIDERS ALSO THROUGH KNOWN SOURCES. HENCE THE ISSUANCE OF PREFERENCE SHARES OF RS 100000 EACH CANNOT BE DOUBTED OR QUESTIONED BY THE REVENUE AND THERE IS ABSOLUTELY NO REASON TO TREAT THE SAME AS SHAM OR A COLOURABLE DEVICE. AT THIS JUNCTURE, WE WOULD LIKE TO POINT OUT THAT IT IS NOW WELL SETTL ED THAT THE REVENUE CANNOT SIT IN THE ARMCHAIR OF A BUSINESSMAN AND DICTATE AS TO HOW THE BUSINESSMAN SHOULD CONDUCT HIS BUSINESS AND HAVE HIS AFFAIRS. THE BUSINESSMAN KNOWS HIS INTEREST BEST. RELIANCE IN THIS REGARD IS PLACED ON THE DECISION OF THE HON BLE SUPREME COURT IN THE CASE OF CIT VS DHANRAJ GIRJI RAJA NARASINGHERJI (1973) 91 ITR 544 (SC). FURTHER RELIANCE IS ALSO PLACED ON THE DECISION OF THE HONBLE APEX COURT IN THE CASE OF CIT VS WALCHAND AND CO. (1967) 65 ITR 381 (SC) WHEREIN IT WAS HELD T HAT IN APPLYING THE TEST OF COMMERCIAL EXPEDIENCY WHETHER THE EXPENDITURE WAS EXCESSIVELY LAID DOWN FOR THE PURPOSE OF BUSINESS, REASONABLENESS OF THE EXPENDITURE IS TO BE JUDGED FROM THE POINT OF VIEW OF A BUSINESSMAN AND NOT THAT OF THE REVENUE. BY FOLL OWING THE SAID PROPOSITION, WE FIND THAT THE OBSERVATION OF THE LD CITA, THAT NO PRUDENT BUSINESSMAN WOULD COME FORWARD TO INVEST IN PREFERENCE SHARES OF M/S SOIL WHO HAD ALREADY DEFAULTED WAY BACK IN 1984 AND YET ANOTHER OBSERVATION THAT IT IS LIKE THROWI NG GOOD MONEY FOR BAD MONEY , IS NOT AT ALL WARRANTED. 7.1. IT IS PERTINENT TO NOTE THAT AT THE TIME OF MAKING INVESTMENT IN PREFERENCE SHARES IN TWO TRANCHES IN JANUARY AND MARCH 1999 BY THE ASSESSEE COMPANY IN M/S SOIL, THERE WAS ABSOLUTELY NO INTENTI ON OR NOT EVEN REMOTELY POSSIBLE FOR THE ASSESSEE TO PRE - EMPT THAT IT WOULD SELL THE SHARES OF BAJAJ AUTO LTD DURING THE PERIOD FROM SEPTEMBER 1999 TO MARCH 2000 RELEVANT TO ASST YEAR 2000 - 01. HENCE THE OBSERVATION OF THE LD DR THAT THE INVESTMENT IN PRE FERENCE SHARES AT FACE VALUE OF RS 100000 EACH WAS MADE WITH A VIEW TO REDUCE THE TAX LIABILITY ON SALE OF SHARES OF BAJAJ ITA NO. 4431/MUM/2004 M/S. LAXMIWADI MINES & MINERALS PVT. LTD., 10 AUTO LTD. WE FIND THAT M/S SOIL HAD DULY JUSTIFIED THE ISSUANCE OF PREFERENCE SHARES AT FACE VALUE OF RS 100000 EACH TO THE ASSESSE E IN ASST YEAR 1999 - 2000 SO THAT IT COULD RAISE PREFERENCE CAPITAL FROM OUTSIDERS ALSO AT THE SAME RATE. MOREOVER, WE FIND THAT M/S SOIL HAD ALSO ISSUED 450 10% REDEEMABLE CUMULATIVE PREFERENCE SHARES AT FACE VALUE OF RS 100000 EACH IN ASST YEAR 2000 - 01 ALSO TO OFFSET THE EROSION OF NET WORTH DUE TO PERSISTENT LOSSES IN ASST YEAR 2000 - 01 ALSO. IT IS ALSO PERTINENT TO NOTE THAT THE ASSESSEE HAD SOLD ITS PREFERENCE SHARES HELD IN M/S SOIL ON 28.3.2000 FOR RS 7500 PER SHARE TO AN UNRELATED PARTY M/S MORGAN ITE INDIA LTD WHICH CANNOT BE DOUBTED / DISPUTED BY THE REVENUE. THE ENTIRE ALLEGATION OF THE REVENUE IS THAT THE ASSESSEE COMPANY HAD MADE INVESTMENT AT A PRICE WHICH THE INVESTEE COMPANY I.E M/S SOIL IS NOT WORTH OF. THIS ALLEGATION HAS BEEN DULY ANSW ERED FROM THE INTENT AND PURPOSE OF MAKING INVESTMENT IN PREFERENCE SHARES AT SUCH VALUE IN THE AFOREMENTIONED PARAS AND HENCE THE SAME ARE NOT REITERATED FOR THE SAKE OF BREVITY. HENCE WHEN THE PURCHASE OF SHARES HAS BEEN LOGICALLY AND DULY EXPLAINED BY THE ASSESSEE AND WHEN THE SALE PRICE OF SHARES CANNOT BE DOUBTED BY THE REVENUE, THEN THERE IS NO CASE FOR THE REVENUE TO DISALLOW THE CAPITAL LOSS INCURRED THEREON AND ITS CONSEQUENTIAL SET OFF AGAINST THE LONG TERM CAPITAL GAIN ON SALE OF SHARES OF BAJAJ AUTO LTD. IN CASE IF THE REVENUE IS ENTERTAINING ANY DOUBT ON THE SUBJECT MENTIONED SALE TRANSACTION, IT SHOULD HAVE MADE NECESSARY ENQUIRIES WITH THE BUYER OF PREFERENCE SHARES I.E MORGANITE INDIA LTD IN THE MANNER KNOWN TO LAW. WITHOUT UNDERTAKING ANY SUCH EXERCISE, THE REVENUE CANNOT SIMPLY DISBELIEVE THE TRANSACTIONS MERELY BASED ON SUSPICION, SURMISE AND CONJECTURE. 7.2. WE FIND THAT THE ASSESSEE HAD PLEADED BEFORE THE LD CITA THAT IT HAD NEGOTIATED A BETTER SALE PRICE WITH M/S MORGANITE INDIA LT D AT RS 7500 PER SHARE WHICH IS ABOVE THE VALUE PER SHARE FIXED AT RS 7200 PER SHARE BY AN ITA NO. 4431/MUM/2004 M/S. LAXMIWADI MINES & MINERALS PVT. LTD., 11 INDEPENDENT VALUER IN THE SHARE VALUATION REPORT DATED 16.3.2000 BY APPLYING THE BREAK UP VALUE METHOD FOR VALUATION OF SHARES. WE FIND THAT THE LD AR BEFORE US HAD ADMITTED THAT THIS VALUATION REPORT WAS NEVER PRODUCED BY THE ASSESSEE BEFORE THE LD AO. BUT WE FIND THAT THE LD CITA IN PAGE 7 OF HIS ORDER HAD REFERRED TO THIS BREAK UP VALUE METHOD ADOPTED BY THE ASSESSEE AND ARRIVING AT RS 7200 PER SHARE AS THE VALUE OF PREFERENCE SHARES. WE FIND THAT THE LD CITA HAVING REFERRED TO THIS VALUATION OF RS 7200 PER SHARE HAD NOT MADE ANY OBSERVATIONS IN HIS ORDER REGARDING THE SAME. HENCE IT COULD BE SAFELY CONCLUDED THAT THE SAID VALUATION REPORT WAS DULY PLACED BEFOR E THE LD CITA IN THE COURSE OF APPELLATE PROCEEDINGS AND IS ALREADY FORMING PART OF RECORDS OF THE REVENUE. WE FIND THAT THE ASSESSEE HAD FILED A PETITION UNDER RULE 29 OF THE INCOME TAX APPELLATE TRIBUNAL RULES FOR ADMISSION OF ADDITIONAL EVIDENCES FILED IN THE FORM OF THIS SHARE VALUATION REPORT DATED 16.3.2000 AS A MATTER OF ABUNDANT CAUTION AND IN ORDER TO PUT AN END TO ANY CONTROVERSY THAT IS BEING RAISED BY THE REVENUE IN THIS REGARD. HOWEVER, NO ARGUMENTS WERE ADVANCED BY THE LD AR BEFORE US REGARD ING THE SAME. WE HAVE ALREADY HELD SUPRA THAT THE LD CITA HAD ALREADY REFERRED TO THE SAID VALUATION REPORT AND VALUE PER SHARE OF RS 7200 PER SHARE AT PAGE 7 OF HIS ORDER AND HENCE WE DO NOT DEEM IT FIT AND APPROPRIATE TO ADMIT THIS VALUATION REPORT AS AN ADDITIONAL EVIDENCE FILED FOR THE FIRST TIME BEFORE US IN THE FACTS AND CIRCUMSTANCES OF THE CASE MENTIONED SUPRA. 7.3. WE FIND FROM THE SAID SHARE VALUATION REPORT DATED 16.3.2000, THE INDEPENDENT VALUER HAD ALSO TAKEN COGNIZANCE OF THE LIKELY LOSS THAT M/S SOIL WOULD INCUR DUE TO DISTURBING BUSINESS TRENDS IN THE INDUSTRY DUE TO VARIOUS REASONS AND ACCORDINGLY HAD EVEN CONSIDERED / FACTORED THE INFUSION OF ADDITIONAL PREFERENCE SHARE CAPITAL TO BE INFUSED IN ASST YEAR 2000 - 01 ALSO TO THE TUNE OF RS 4,50 ,00,000/ - . THIS IS THE REASON FOR M/S SOIL ISSUING 450 10% CUMULATIVE REDEEMABLE PREFERENCE SHARES AT FACE ITA NO. 4431/MUM/2004 M/S. LAXMIWADI MINES & MINERALS PVT. LTD., 12 VALUE OF RS 100000 EACH IN ASST YEAR 2000 - 01 ALSO AND HENCE NO ADVERSE INFERENCE COULD BE DRAWN ON THE SAME. WE FIND THAT THE INDEPENDENT VALUER I N HIS SHARE VALUATION REPORT HAD TAKEN DUE COGNIZANCE OF POLICY DECISIONS OF UP STATE GOVERNMENT WITH REGARD TO PRICING OF MOLASSES VIS A VIS THE COMPETITIVE POSITION OF SIMILAR INDUSTRIAL UNITS IN THE COUNTRY, WHICH IN TURN HAD ACTED AS GREAT DETERRENCE I N THE NORMAL RUNNING OF THE BUSINESS OF M/S SOIL. HE HAD ALSO TAKEN DUE CONSIDERATION OF NORMAL WORKING OF DISTILLERY PLANT OF M/S SOIL IN THE LAST TWO YEARS WHICH WAS AFFECTED MOSTLY DUE TO HEAVY FLOODS IN THE EASTERN PARTS OF UP STATE LARGELY AFFECTING T HE SUGARCANE CROPS AND AVAILABILITY OF MOLASSES. AFTER TAKING INTO ACCOUNT THE VARIOUS FACTORS, THE INDEPENDENT REGISTERED VALUER VIDE HIS REPORT DATED 16.3.2000 HAD DETERMINED THE VALUE OF PREFERENCE SHARE AT RS 7200 PER SHARE. THE ASSESSEE COMPANY PU RSUANT TO ITS NEGOTIATIONS WITH AN UNRELATED THIRD PARTY M/S MORGANITE INDIA LTD HAD SOLD THE PREFERENCE SHARES ULTIMATELY AT RS 7500 PER SHARE WHICH IS ABOVE THE VALUE MENTIONED IN THE VALUATION REPORT. 7.4. WE FIND THAT THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF MCDOWELL & CO. LTD REPORTED IN 154 ITR 148 (SC) RELIED UPON BY THE LD CITA WOULD NOT APPLY AS THERE IS NO EVIDENCE TO PROVE THAT THE PURCHASE AND SALE TRANSACTIONS CARRIED OUT BY THE ASSESSEE ARE MALAFIDE. 7.5. WE FIND THAT THE LD CI TA HAD PLACED RELIANCE ON THE DECISION OF CO - ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF BOMBAY OIL INDUSTRIES VS DCIT REPORTED IN 82 ITD 626 (MUM ITAT) IN SUPPORT OF CONTENTIONS OF THE REVENUE. THE LD AR PLACED A COMPARATIVE CHART OF THE ENTIRE FINDIN GS OF BOMBAY OIL INDUSTRIES (BOI IN SHORT) AND THE CASE OF THE ASSESSEE AND HAD FACTUALLY DISTINGUISHED AS UNDER: - FINDINGS IN BOI OUR COMMENTS ITA NO. 4431/MUM/2004 M/S. LAXMIWADI MINES & MINERALS PVT. LTD., 13 APPELLANT COMPANY HAD SOLD SHARES OF EPRO WHICH WAS WHOLLY OWNED SUBSIDIARY COMPANY OF' APPE LLANT. IN OUR CASE, SOIL IS NOT A SUBSIDIARY COMPANY. RIGHT SHARES WERE ALLOTTED TO APPELLANT BY ADJUSTMENT OF DEBT OWNED BY EPRO TO ASSESSEE. ALLOTMENT OF PREFERENCE SHARES WERE RECEIVED AGAINST PAYMENT OF FULL VALUE. SHARE A PPLICATION MONIES WERE TAKEN BACK BY ASSESSEE BY WAY OF SECURITY DEPOSIT. NO SUCH SECURITY DEPOSIT ISSUE MANIPULATED TRANSACTIONS WERE MADE BY PREPARING BY CERTAIN DOCUMENTS AND AGREEMENTS. NO SUCH ALLEGATION IN THE APPELLANT'S CASE INCREASE AND ISSUE OF CAPITAL OF EPRO, SECURITY DEPOSIT WERE DONE HURRIEDLY TRANSFER OF SHARE SPREAD OVER TWO (2) FINANCIAL YEARS ISSUE OF SHARE CAPITAL WAS MUCH BEFORE ALMOST TWELVE (12) MONTHS BEFORE THE SALES. PURCHAS E OF SHARES OF SOIL - IN JANUARY 1999 AND MARCH 1999 SALE OF SHARES OF SOIL - IN MARCH 2000 EPRO WAS A SHELL COMPANY SOIL IS A LISTED ON STOCK EXCHANGE NO FUNDS WERE ACTUALLY TRANSFERRED / EXCHANGED ALL AMOUNTS WERE PAID AND RECEIVED T HROUGH PROPER BANKING CHANNEL. NO VIOLATION OF ANY LAWS. OBLIGING PERSON WAS IN PICTURE NO SUCH PERSON INVOLVED / A STRAIGHT FORWARD TRANSACTION NO ADHERENCE TO BUSINESS NORMS & LAW SHARES WERE ISSUED AFTER FULL COMPLIANCE WITH ALL LAWS. EPROS PRO FIT AND LOSS ACCOUNT SHOWED NO SALES AND BALANCE SHEET HAD NO ASSETS SOIL FULLY OPERATIONAL CONCERN. CERTIFIED AS A GOING CONCERN BY THE AUDITORS | FROM THE ABOVE TABULATION , IT IS QUITE EVIDENT THAT THE FACTS BEFORE THE MUMBAI TRIBUNAL RELIED UPON BY THE LD CITA ARE FACTUALLY DISTINGUISHABLE AND HENCE DOES NOT ADVANCE THE CASE OF THE REVENUE. 7.6. WE FIND THAT THE RELIANCE PLACED BY THE LD AR ON THE DECISION OF HONBLE KARNATAKA HIGH COURT IN THE CASE OF BHORUKA ENGINEERING IN DS. LTD VS DCIT REPORTED IN (2013) 36 TAXMANN.COM 82 (KARNATAKA) DATED ITA NO. 4431/MUM/2004 M/S. LAXMIWADI MINES & MINERALS PVT. LTD., 14 9.4.2013 IS WELL FOUNDED WHICH HAD CONSIDERED THE VARIOUS APEX COURT DECISIONS ON THE ISSUE OF SHAM TRANSACTION AND COLOURABLE DEVICE. THE QUESTION BEFORE THE HONBLE KARNATAKA HIGH CO URT IS AS UNDER: - 9. THIS APPEAL WAS ADMITTED ON 15.6.2011 TO CONSIDER THE FOLLOWING SUBSTANTIAL QUESTIONS OF LAW: - '1. WHETHER THE FINDING OF THE TRIBUNAL THAT THE TRANSFER OF SHARES BY THE APPELLANT TO ANOTHER LIMITED COMPANY WOULD AMOUNT TO SALE OF IMMOVABLE PROPERTY HELD BY THE COMPANY WHOSE SHARES WERE SOLD BY THE APPELLANT - COMPANY AND THE CAPITAL GAINS ARISING ON SUCH SALE OF SHARES WILL BE LIABLE TO BE ASSESSED AS CAPITAL GAINS ARISING ON THE SALE OF THE PROPERTY, IS PERVERSE AND ARBITRARY? THE HONBLE KARNATAKA HIGH COURT OBSERVED AS UNDER: - 15. THE APEX COURT SUBSEQUENTLY HAD AN OCCASION TO CONSIDER THIS JUDGMENT, IN THE CASE OF UNION OF INDIA V. AZADI BACHAO ANDOLAN AIR 2004 SC 1107. IN THE AFORESAID DECISION, AFTER REFERRING TO THE ENTIRE C ATENA OF CASES UP - TO - DATE INCLUDING THE AFORESAID CONSTITUTION BENCH JUDGMENT AS WELL AS THE OPINION EXPRESSED IN THE SAID JUDGMENT BY JUSTICE CHINNAPPA REDDY, THE APEX COURT HELD AS UNDER: '146. WITH RESPECT, THEREFORE, WE ARE UNABLE TO AGREE WITH THE VIE W THAT DUKE OF WESTMINSTER IS DEAD, OR THAT ITS GHOST HAS BEEN EXORCISED IN ENGLAND. THE HOUSE OF LORDS DOES NOT SEEM TO THINK SO, AND WE AGREE WITH RESPECT. IN OUR VIEW, THE PRINCIPLE IN DUKE OF WESTMINSTER IS VERY MUCH ALIVE AND KICKING IN THE COUNTRY OF ITS BIRTH. AND AS FAR AS THIS COUNTRY IS CONCERNED, THE OBSERVATIONS OF SHAH, J. IN CIT V. RAMAN ARE VERY MUCH RELEVANT EVEN TODAY'. '153. THE CONSTITUTION BENCH REITERATED THE OBSERVATIONS IN BANK OF CHETTINAD LTD . V. CIT , QUOTING WITH APPROVAL THE OBSER VATIONS OF LORD RUSSEL OF KILLOWEN IN IRC V. DUKE OF WESTMINSTER AND THE OBSERVATIONS OF LORD SIMONDS IN RUSSELL V. SCOTT '. '154. IT THUS APPEARS TO US THAT NOT ONLY IS THE PRINCIPLE IN DUKE OF WESTMINSTER ALIVE AND KICKING IN ENGLAND, BUT IT ALSO SEEMS TO HAVE ACQUIRED JUDICIAL BENEDICTION OF THE CONSTITUTIONAL BENCH IN INDIA, NOTWITHSTANDING THE TEMPORARY TURBULENCE CREATED IN THE WAKE OF MCDOWELL.' 'WE ARE UNABLE TO AGREE WITH THE SUBMISSION THAT AN ACT WHICH IS OTHERWISE VALID IN LAW CAN BE TREATED AS N ON EST MERELY ON THE BASIS OF SOME UNDERLYING MOTIVE SUPPOSEDLY RESULTING IN SOME ECONOMIC DETRIMENT OR PREJUDICE TO THE NATIONAL INTERESTS, AS PERCEIVED BY THE RESPONDENTS'. THOUGH THE WORDS : 'SHAM' AND 'DEVICE' WERE LOOSELY USED IN CONNECTION WITH THE I NCORPORATION UNDER THE MAURITIUS LAW, WE DEEM IT FIT TO ENTER A CAVEAT HERE. THESE WORDS ARE NOT INTENDED TO BE USED AS MAGIC MANTRAS OR CATCH - ALL PHRASES TO DEFEAT OR NULLIFY THE EFFECT OF A LEGAL SITUATION.' 16. THIS COURT HAD AN OCCASION TO CONSIDER THE AFORESAID JUDGMENTS IN THE CASE OF STATE OF KARNATAKA V . VIDEOCON INTERNATIONAL LTD. IN STRP NO.4/2000 IN ITS JUDGMENT DATED 14.07.2010, WHEREIN IT HAS OBSERVED AS UNDER: ITA NO. 4431/MUM/2004 M/S. LAXMIWADI MINES & MINERALS PVT. LTD., 15 '33. FROM THE AFORESAID DISCUSSION, IT IS CLEAR THAT THERE IS NO INCONSISTENCY OR DE VIATION IN THE APPROACH TO THE INTERPRETATION OF THE TAXATION LAW IN ENGLAND, AMERICA AS WELL AS IN INDIA. IT IS NOW WELL SETTLED THAT A CITIZEN IS ENTITLED TO ARRANGE HIS AFFAIRS AS NOT TO ATTRACT TAXES IMPOSED BY THE STATE, SO FAR AS HE CAN DO SO WITHIN THE LAW. EVERY MAN IS ENTITLED TO ORDER HIS AFFAIRS IN SUCH A MANNER THAT THE TAX ATTACHING UNDER THE APPROPRIATE ACTS IS LESS THAN IT OTHERWISE WOULD BE. IF HE SUCCEEDS IN ORDERING THEM SO AS TO SECURE THE SAID RESULT, HIS INGENUITY IS TO BE RESPECTED AND HE CANNOT BE COMPELLED TO PAY AN INCREASED TAX. HE MAY LEGITIMATELY CLAIM THE ADVANTAGE OF ANY EXPRESS TERMS OR OF ANY OMISSIONS THAT HE CAN FIND IN HIS FAVOUR IN TAXING STATUTES. HIS LEGAL RIGHT SO TO DISPOSE OF HIS CAPITAL AND INCOME AS TO ATTRACT UPON HIMSELF THE LEAST AMOUNT OF TAX IS FULLY RECOGNIZED. THE LAW DOES NOT OBLIGE A TRADER TO MAKE THE MAXIMUM PROFIT THAT HE CAN OUT OF HIS TRADING TRANSACTIONS. THE LEGAL RIGHT OF TAXPAYER TO DECREASE THE AMOUNT OF WHAT OTHERWISE WOULD BE HIS TAXES, OR ALTOGE THER TO AVOID THEM BY MEANS WHICH THE LAW PERMITS, CANNOT BE DOUBTED. THE BASIC PROPOSITION UNDERLINING THIS TAXATION LAW IS THAT ANY TAXPAYER IS ENTITLED SO AS TO ORDER HIS AFFAIRS IN SUCH A MANNER AS TO SEE THAT HIS LIABILITY TO TAX IS AS LOW AS POSSIBLE . IF THE TAXPAYER IS IN A POSITION TO CARRY THROUGH A TRANSACTION IN TWO ALTERNATIVE WAYS, ONE OF WHICH WILL RESULT IN LIABILITY TO TAX AND THE OTHER OF WHICH WILL NOT, IS AT LIBERTY TO CHOOSE THE LATTER AND TO DO SO EFFECTIVELY IN THE ABSENCE OF ANY SPECI FIC TAX AVOIDANCE PROVISION. THE FACT THAT THE MOTIVE FOR A TRANSACTION MAY BE TO AVOID TAX DOES NOT INVALIDATE IT UNLESS A PARTICULAR ENACTMENT SO PROVIDES. EVERY PERSON IS ENTITLED TO SO ARRANGE HIS AFFAIRS AS TO AVOID TAXATION BUT THE ARRANGEMENT SHOULD BE REAL AND GENUINE AND NOT A SHAM OR MAKE - BELIEVE. A TAXPAYER MAY RESORT TO A DEVICE TO DIVERT THE INCOME BEFORE IT ACCRUES OR ARISES TO HIM. EFFECTIVENESS OF THE DEVICE DEPENDS NOT UPON CONSIDERATIONS OF MORALITY, BUT ON THE OPERATION OF THE INCOME - TAX ACT. COLOURABLE DEVICES CANNOT BE PART OF TAX PLANNING. A TAX - SAVING MOTIVATION DOES NOT JUSTIFY THE TAXING AUTHORITIES OR THE COURTS IN NULLIFYING OR DISREGARDING A TAXPAYER'S OTHERWISE PROPER AND BONA FIDE CHOICE AMONG COURSES OF ACTION. LEGISLATIVE INJU NCTION IN TAXING STATUTES MAY NOT, EXCEPT ON PERIL OF PENALTY, BE VIOLATED, BUT IT MAY LAWFULLY BE CIRCUMVENTED. TAX PLANNING MAY BE LEGITIMATE PROVIDED IT IS WITHIN THE FRAMEWORK OF LAW. THE INTENTION OF THE LEGISLATURE IN A TAXATION STATUTE IS TO BE GATH ERED FROM THE LANGUAGE OF THE PROVISIONS PARTICULARLY WHERE THE LANGUAGE IS PLAIN AND UNAMBIGUOUS. IN A TAXING ACT, IT IS NOT POSSIBLE TO ASSUME ANY INTENTION OR GOVERNING PURPOSE OF THE STATUTE MORE THAN WHAT IS STATED IN THE PLAIN LANGUAGE'. 17. RECENTLY , THESE JUDGMENTS FELL FOR CONSIDERATION BEFORE THE APEX COURT IN THE CASE OF VODAFONE INTERNATIONAL HOLDINGS B.V . V. UNION OF INDIA [2012] 341 ITR 1/204 TAXMAN 408 . AFTER REFERRING TO THE AFORESAID TWO' JUDGMENTS OF THE APEX COURT AT PARAGRAPH NO.64, IT HAS BEEN HELD AS UNDER: '64. THE MAJORITY JUDGMENT IN MC.DOWELL HELD THAT 'TAX PLANNING MAY BE LEGITIMATE PROVIDED IT IS WITHI N THE FRAMEWORK OF LAW' (PARAGRAPH 45). IN THE LATTER PART OF PARAGRAPH 45, IT HELD THAT 'COLOURABLE DEVICES CANNOT BE A PART OF TAX PLANNING AND IT IS WRONG TO ENCOURAGE OR ENTRAIN ENTERTAIN THE BELIEF THAT IT IS HONOURABLE TO AVOID THE PAYMENT OF TAX BY RESORTING TO DUBIOUS METHODS' IT IS THE OBLIGATION OF EVERY CITIZEN TO PAY THE TAXES WITHOUT RESORTING TO SUBTERFUGES. THE ABOVE OBSERVATIONS SHOULD BE READ WITH PARAGRAPH 46 WHERE THE MAJORITY HOLDS 'ON THIS ASPECT, ONE OF US, CHINNAPPA REDDY J. HAS PROPO SED ITA NO. 4431/MUM/2004 M/S. LAXMIWADI MINES & MINERALS PVT. LTD., 16 A SEPARATE AND DETAILED OPINION WITH WHICH WE AGREE'. THE WORDS 'THIS RESPECT' 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 SUBTERFUGES. THUS, IT CANNOT BE SAID THAT ALL TAX PLANNING IS ILLEGAL / ILLEGITIMATE / IMPERMISSIBLE MOREOVER, REDDY J. HIMSELF SAYS THAT HE AGREES WITH THE MAJORITY. IN THE JUDGMENT OF REDDY J. THERE ARE REPEATED REFERENCES TO SCHEMES AND DEVICES IN CONTR ADISTINCTION TO 'LEGITIMATE AVOIDANCE OF TAX LIABILITY.' IN OUR VIEW, ALTHOUGH CHINNAPPA REDDY J. MAKES A NUMBER OF OBSERVATIONS REGARDING THE NEED TO DEPART FROM THE WESTMINSTER AND TAX AVOIDANCE - THESE ARE CLEARLY ONLY IN. THE CONTEXT OF ARTIFICIAL AND COLOURABLE DEVICES. READING MCDOWELL, IN THE MANNER INDICATED HEREINABOVE, IN CASES OF TREATY SHOPPING AND / OR TAX AVOIDANCE, THERE IS NO CONFLICT BETWEEN MCDOWELL AND AZADI BACHAO OR BETWEEN MCDOWELL AND MATHURAM AGRAWAL.' 18. JUSTICE K.S. RADHAKRISHNAN J., WHO HAS WRITTEN A SEPARATE BUT A CONCURRING OPINION DEALING WITH THE QUESTION WHETHER MCDOWELL CALLS FOR RE - CONSIDERATION HAS OBSERVED AS UNDER: 'REVENUE CANNOT TAX A SUBJECT WITHOUT A STATUTE TO SUPPORT AND IN THE COURSE WE ALSO ACKNOWLEDGE THAT EVERY TAXPAYER IS ENTITLED TO ARRANGE HIS AFFAIRS SO THAT HIS TAXES SHALL BE AS LOW AS POSSIBLE AND THAT HE IS NOT BOUND TO CHOOSE THAT PATTERN WHICH WILL REPLENISH THE TREASURY. REVENUE'S STAND THAT THE RATIO LAID DOWN IN MCDOWELL IS CONTRARY TO WHAT HAS BEEN LAID DOWN IN AZADI BACHAO ANDOLAN, IN OUR VIEW, IS UNSUSTAINABLE AND, THEREFORE, CALL FOR NO RECONSIDERATION BY A LARGER BENCH.' 19. IN VIEW OF THE JUDGMENT OF THE APEX COURT IN VODAFONE, IT IS HELD THAT 'TAX PLANNING MAY BE LEGITIMATE PROVIDED IT IS WITHI N THE FRAMEWORK OF LAW'. 'COLOURABLE DEVICES CANNOT BE A PART OF TAX PLANNING AND IT IS WRONG TO ENCOURAGE OR ENTERTAIN THE BELIEF THAT IT IS HONOURABLE TO AVOID PAYMENT OF TAX BY RESORTING TO DUBIOUS METHODS'. IT IS AN OBLIGATION OF EVERY CITIZEN TO PAY T HE TAXES WITHOUT RESORTING TO SUBTERFUGES. THEREFORE, THOUGH ALL TAX PLANNING IS ILLEGAL / ILLEGITIMATE / IMPERMISSIBLE, THE REVENUE CANNOT TAX A SUBJECT WITHOUT A STATUTE TO SUPPORT AND IN THE COURSE WE ALSO ACKNOWLEDGE THAT EVERY TAXPAYER IS ENTITLED TO ARRANGE HIS AFFAIRS SO THAT HIS TAXES SHALL BE AS LOW AS POSSIBLE AND THAT HE IS NOT BOUND TO CHOOSE THAT PATTERN WHICH WILL REPLENISH THE TREASURY. A CITIZEN MAY LEGITIMATELY CLAIM THE ADVANTAGE OF ANY EXPRESS TERMS OR OF ANY OMISSIONS THAT HE CAN FIND I N HIS FAVOUR IN TAXING STATUTES. HIS LEGAL RIGHT SO TO DISPOSE OF HIS CAPITAL AND INCOME AS TO ATTRACT UPON HIMSELF THE LEAST AMOUNT OF TAX IS FULLY RECOGNIZED. THE LEGAL RIGHT OF TAXPAYER TO DECREASE THE AMOUNT OF WHAT OTHERWISE WOULD BE HIS TAXES, OR ALT OGETHER TO AVOID THEM BY MEANS WHICH TIRE LAW PERMITS, CANNOT BE DOUBTED. IF THE TAXPAYER IS IN A POSITION TO CARRY THROUGH A TRANSACTION IN TWO ALTERNATIVE WAYS, ONE OF WHICH WILL RESULT IN LIABILITY TO TAX AND THE OTHER OF WHICH WILL NOT, IS AT LIBERTY T O CHOOSE THE LATTER AND TO DO SO EFFECTIVELY IN THE ABSENCE OF ANY SPECIFIC TAX AVOIDANCE PROVISION. THE FACT THAT THE MOTIVE FOR A TRANSACTION MAY BE TO AVOID TAX DOES NOT INVALIDATE IT UNLESS A PARTICULAR ENACTMENT SO PROVIDES. A TAX - SAVING MOTIVATION DO ES NOT JUSTIFY THE TAXING AUTHORITIES OR THE COURTS IN NULLIFYING OR DISREGARDING A TAXPAYER'S OTHERWISE PROPER AND BONA FIDE CHOICE AMONG COURSES OF ACTION. TAX PLANNING MAY BE LEGITIMATE PROVIDED IT IS WITHIN THE FRAMEWORK OF LAW. THE INTENTION OF THE LE GISLATURE IN A TAXATION STATUTE IS TO BE GATHERED FROM THE LANGUAGE OF THE PROVISIONS PARTICULARLY WHERE THE LANGUAGE IS PLAIN AND UNAMBIGUOUS. IN A TAXING ACT, IT IS NOT POSSIBLE TO' ASSUME ANY INTENTION OR ITA NO. 4431/MUM/2004 M/S. LAXMIWADI MINES & MINERALS PVT. LTD., 17 GOVERNING PURPOSE OF THE STATUTE MORE THAN WHAT IS STATED IN THE PLAIN LANGUAGE. THEREFORE, AS LONG AS THE ARRANGEMENT OF THE ASSESSEE TO AVOID PAYMENT OF TAX DO NOT CONTRAVENE ANY STATUTORY PROVISION AND IS ACHIEVED WITHIN THE FOUR CORNERS OF LAW, IT CANNOT BE FOUND FAULT WITH. IF THE TRANSACTION IN QU ESTION IS SHAM OR COLOURABLE AND ENTERED INTO WITH THE SOLE INTENTION OF EVADING PAYMENT OF TAX, THEN SUCH A TRANSACTION WOULD NOT HAVE ANY LEGITIMACY. THEREFORE, A COLOURABLE DEVICE CANNOT BE A PART OF TAX PLANNING. THEREFORE, IN EACH CASE, THE TRANSACTIO N IN QUESTION AND THE MATERIAL ON RECORD HAS TO BE CAREFULLY EXAMINED TO FIND OUT WHETHER THE TRANSACTION IS 'SHAM' OR 'UNREAL' OR 'COLOURABLE DEVICE' TO EVADE PAYMENT OF TAX. (UNDERLINING PROVIDED BY US) 25. AS SET OUT ABOVE, THE TRANSACTION IS REAL, VALU ABLE CONSIDERATION IS PAID, ALL LEGAL FORMALITIES ARE COMPLIED WITH AND WHAT IS TRANSFERRED IS THE SHARES AND NOT THE IMMOVABLE PROPERTY. THE FINDING OF THE ASSESSING AUTHORITY THAT IT IS A TRANSFER OF IMMOVABLE PROPERTY IS CONTRARY TO LAW AND CONTRARY TO THE MATERIAL ON RECORD. THEY COMMITTED A SERIOUS ERROR IN PROCEEDING ON THE ASSUMPTION THAT THE EFFECT OF TRANSFER OF SHARE IS TRANSFER OF IMMOVABLE PROPERTY AND THEREFORE, IF THE VEIL OF THE COMPANY IS LIFTED WHAT APPEARS TO THEM IS TRANSFER OF IMMOVABLE PROPERTY. SUCH A FINDING IS IMPERMISSIBLE IN LAW. UNFORTUNATELY, THREE AUTHORITIES COMMITTED THE VERY SAME MISTAKE WHICH IS EX FACIE, ILLEGAL, CONTRARY TO SETTLED LEGAL POSITION AND THEREFORE, REQUIRES TO BE SETASIDE. IN THAT VIEW OF THE MATTER, WE PASS TH E FOLLOWING ORDER: ( A ) APPEAL IS ALLOWED. ( B ) THE IMPUGNED ORDER PASSED BY ALL THE THREE AUTHORITIES IS HEREBY SET ASIDE. ( C ) THE SUBSTANTIAL QUESTION OF LAW IS ANSWERED IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE. 7.7. WE FIND THAT THE HO NBLE GUJARAT HIGH COURT IN THE CASE OF CIT VS SPECIAL PRINTS LTD REPORTED IN (2013) 33 TAXMANN.COM 463 (GUJARAT) DATED 15.4.2013 WHEREIN IT WAS HELD AS UNDER: - 7. IF ONE PERUSES THE ORDER OF THE ASSESSING OFFICER AS A WHOLE, PRIMARILY, HE WAS CONCERNED A BOUT THE ASSESSEE HAVING SOLD SIZEABLE NUMBER OF SHARES INVITING CONSIDERABLE LOSS DURING THE SAME PERIOD, WHEN THE ASSESSEE HAD SOLD CERTAIN ASSETS AND EARNED CAPITAL GAIN. SURELY, MERELY BECAUSE THE ASSESSEE CLAIMED SET OFF OF CAPITAL LOSS AGAINST THE CA PITAL GAIN INCURRED DURING THE SAME PERIOD BY ITSELF CANNOT BE BRANDED AS A COLOURABLE DEVICE OR METHOD FOR TAX AVOIDANCE. IF BOTH THE TRANSACTIONS ARE GENUINE AND ALSO TRADED AT PROPER VALUATION, MERELY BECAUSE THE PERIOD CO - EXISTED OR PERMITTED THE ASSES SEE TO SET OFF ITS CAPITAL LOSS AGAINST SOME CAPITAL GAIN, BY ITSELF WOULD NOT GIVE RISE TO THE PRESUMPTION THAT THE TRANSACTION WAS IN THE NATURE OF COLOURABLE DEVICE. EVEN IF THE ASSESSEE CONSCIOUSLY ENTERED INTO THE TRANSACTION WITH AN OBJECT OF EARNING SET OFF, MAY BE A CASE OF TAX PLANNING BUT AS LONG AS SUCH TAX PLANNING IS ACHIEVED THROUGH LEGITIMATE MEANS, THE REVENUE SURELY CANNOT OBJECT TO THE SAME. 7.1 THE FACT THAT THE ASSESSEE SOLD ONLY 12 LAKH SHARES OUT OF MORE THAN 15 LAKH SHARES OF A CERTAI N SCRIP HELD BY IT AGAIN BY ITSELF CAN HARDLY BE A FACTOR TO BRAND THE ASSESSEE OF COLOURABLE DEVICE. IT MAY BE ONE OF THE FACTORS TO SET THE ASSESSING OFFICER THINKING, WITHOUT THERE BEING ANYTHING ADDITIONAL IN THE FORM OF ITA NO. 4431/MUM/2004 M/S. LAXMIWADI MINES & MINERALS PVT. LTD., 18 THE VALUATION ITSELF BEING ARTI FICIAL, THE REVENUE CANNOT OBJECT TO THE ASSESSEE SELLING PART OF ITS SHAREHOLDING. 8. IN THE PRESENT CASE THEREFORE, WHAT ESSENTIALLY BOILS DOWN TO IS WHETHER THE SHARES WERE SOLD AT A CORRECT PRICE OR AT THE PRICE WHICH WAS ARTIFICIALLY ARRIVED AT TO INF LATE THE LOSS. IN THIS RESPECT, WE HAVE ALREADY NOTICED THAT THE CIT [A] AS WELL AS THE TRIBUNAL BOTH HAD GONE TO THE FACTUAL FINDINGS PERTAINING TO THE METHODOLOGY ADOPTED BY THE VALUER IN VALUING THE SHARES. WE HAVE ALSO NOTICED THAT THE ASSESSING OFFICE R; EXCEPT FOR DOUBTING SUCH VALUATION, ON THE BASIS OF CIRCUMSTANCES, DID NOT HAVE ANYTHING CONCRETE AT HAND TO HOLD THAT THE PRICE OF RS. 6.25 PER SHARE WAS NOT THE CORRECT PRICE. IN THE CIRCUMSTANCES, WE DO NOT FIND THAT THE TRIBUNAL HAD COMMITTED ANY ER ROR. 9. BEFORE CLOSING, WE MAY NOTICE THAT IN CASE OF PORRITS & SPENCER (ASIA) LTD. V. CIT [2010] 231 190 TAXMAN 174 , THE PUN JAB & HARYANA HIGH COURT HAD SOMEWHAT SIMILAR SITUATION TO TACKLE WITH. REFERRING TO AND RELYING ON THE DECISION OF THE APEX COURT IN CASE OF UNION OF INDIA V. AZADI BACHAO ANDOLAN [2003] 263 ITR 706/132 TAXMAN 373 (SC) AND THE DECISION OF THIS COURT IN CASE OF BANYAN & BERRY V. CIT, [1996] 222 ITR 831/84 TAXMAN 515 (GUJ) ], IT WAS OBSERVED THAT ONCE THE TRANSACTION IS GENUINE MERELY BECAUSE IT HAS BEEN ENTERED INTO WITH A MOTIVE TO AVOID TAX, IT WOULD NOT BECOME COLOURABLE DEVICE, EARNING ANY DISQUALI FICATION. IT WAS OBSERVED AS UNDER : '18. THE AFORESAID DISCUSSION WOULD SHOW THAT ONCE THE TRANSACTION IS GENUINE MERELY BECAUSE IT HAS BEEN ENTERED INTO WITH A MOTIVE TO AVOID TAX, IT WOULD NOT BECOME A COLOURABLE DEVISE AND CONSEQUENTLY EARN ANY DISQUAL IFICATION. HON'BLE THE SUPREME COURT IN THE CONCLUDING PARAS OF ITS JUDGMENT IN AZADI BACHAO ANDOLAN ( SUPRA ) HAS REJECTED THE SUBMISSION THAT AN ACT, WHICH IS OTHERWISE VALID IN LAW, CANNOT BE TREATED AS NON EST MERELY ON THE BASIS OF SOME UNDERLYING MOTIV E SUPPOSEDLY RESULTING IN SOME ECONOMIC DETRIMENT OR PREJUDICE TO THE NATIONAL INTEREST AS PER THE PERCEPTION OF THE REVENUE. THE AFORESAID VIEW LOOKS TO BE THE CORRECT VIEW. IT HAS READY SUPPORT FROM THE DIVISION BENCH JUDGMENT OF THIS COURT RENDERED IN T HE CASE OF SATYA NAND MUNJAL ( SUPRA ) AND THE DIVISION BENCH JUDGMENT OF ORISSA HIGH COURT IN THE CASE OF INDUSTRIAL DEVELOPMENT CORPORATION OF ORISSA LIMITED ( SUPRA ) AND VARIOUS OTHER JUDGMENTS OF DELHI AND MADRAS HIGH COURTS ( SUPRA ).' 10. IN THE RESULT, N O QUESTION OF LAW ARISES. TAX APPEAL IS, THEREFORE, DISMISSED. 7.8. WE FIND THAT THE CO - ORDINATE BENCH OF DELHI TRIBUNAL IN THE CASE OF LALITH KUMAR MODI VS AO REPORTED IN (1991) 37 ITD 422 DATED 25.3.1991 HAD ALSO CONSIDERED THE ASPECT OF COLOURABLE DEV ICE. THE HEAD NOTES OF THE SAID DECISION IS REPRODUCED HEREUNDER: - SECTION 48 OF THE INCOME - TAX ACT, 1961 - CAPITAL GAINS - COMPUTATION OF - ASSESSMENT YEARS 1984 - 85 TO 1986 - 87 - IN ASSESSMENT YEAR 1983 - 84 ASSESSEE HAD SOLD CERTAIN SHARES TO INVESTMENT C OMPANY T, IN WHICH RELATIVES OF ASSESSEE WERE SHAREHOLDERS AND DIRECTORS, AND HAD SUFFERED LOSS - IN ASSESSMENT YEAR IN ITA NO. 4431/MUM/2004 M/S. LAXMIWADI MINES & MINERALS PVT. LTD., 19 QUESTION ASSESSEE SOLD CERTAIN OTHER SHARES TO AFORESAID COMPANY T AND REALISED CERTAIN LONG - TERM CAPITAL GAIN - ASSESSEE CLAIMED SET OF F OF LONG - TERM CAPITAL GAINS AGAINST LONG - TERM CAPITAL LOSS - WHETHER MERELY BECAUSE INVESTMENT COMPANY WAS ENTITLED TO CLAIM DEDUCTION OF DIVIDEND INCOME FROM ITS TOTAL INCOME UNDER SECTION 80M, IT COULD BE SAID THAT TRANSACTION IN QUESTION BECAME A DEVIC E TO AVOID TAXES - HELD, NO - WHETHER, ASSESSEE WAS ENTITLED TO SET OFF OF LONG - TERM CAPITAL GAINS AGAINST LONG - TERM CAPITAL LOSS - HELD, YES 7.9. WE FIND THAT THE CO - ORDINATE BENCH OF CALCUTTA TRIBUNAL IN THE CASE OF ACIT VS TURNER MORRISON & CO. LTD RE PORTED IN (1993) 47 ITD 638 DATED 26.7.1993 HAD ALSO CONSIDERED THE ASPECT OF COLOURABLE DEVICE. THE HEAD NOTES OF THE SAID DECISION IS REPRODUCED HEREUNDER: - SECTION 48, READ WITH SECTION 74, OF THE INCOME - TAX ACT, 1961 - CAPITAL GAINS - COMPUTATION OF - ASSESSMENT YEAR 1986 - 87 - ASSESSEE - COMPANY SOLD A FLAT, RESULTING IN CAPITAL GAINS - IT SOLD CERTAIN EQUITY SHARES OF TWO COMPANIES WHICH RESULTED IN CAPITAL LOSS - ITO, AFTER EXAMINING BROKER TO WHOM SHARES WERE SOLD, AND HIS ACCOUNT BOOKS, NOTICED THAT SOME OF THOSE SHARES HAD BEEN SOLD BY BROKER FOR A PROFIT OF 3 PAISE PER SHARE WHILE REMAINING SHARES WERE STILL LYING WITH HIM UNSOLD - HE HELD THAT SALE OF SHARES BY ASSESSEE WAS A COLOURABLE DEVICE RESORTED TO MERELY FOR AVOIDING TAX ON CAPITAL GAINS, AND DISALLOWED ASSESSEES CLAIM FOR SET OFF OF CAPITAL LOSS - WHETHER, WHERE THERE WAS NOTHING ON RECORD TO SHOW THAT SALE OF SHARES WAS SHAM, AND WHERE THOSE SHARES IN ANY CASE WOULD HAVE TO BE SOLD AT A LOSS, ASSESSEES CHOOSING YEAR IN QUESTION AND THAT TOO TOWARDS CLOSE OF ACCOUNTING YEAR, COULD LEAD TO CONCLUSION THAT LOSS SHOULD BE DISALLOWED AND SET OFF OF SAME AGAINST LONG - TERM CAPITAL GAINS SHOULD BE DISALLOWED - HELD, NO 7.10. WE FIND THAT THE CO - ORDINATE BENCH OF AHMEDABAD TRIBUNAL IN THE CASE OF ACIT VS SUHRID S SARABHAI KAIVANNA REPORTED IN (2015) 55 TAXMANN.COM 325 DATED 4.7.2014 HAD ALSO CONSIDERED THE ASPECT OF COLOURABLE DEVICE. THE HEAD NOTES OF THE SAID DECISION IS REPRODUCED HEREUNDER: - SECTION 45 OF THE INCOME - TAX ACT, 1961 - CAPITAL GAIN - CHARGEABLE AS - ASSESSMENT YEAR 2007 - 08 - WHERE ASSESSEE TRANSFERRED SHARES OF A PRIVATE COMPANY TO HIS FATHER'S HUF AT A PRICE AS PER REPORT OF GOVERNMENT APPROVED VALUER AND CONSIDERATION FOR SAME WAS RECEIVED THROUGH BANKING CHANNEL, TRANSACTION COULD NOT BE HELD AS SHAM AND LOSS ARISING ON SUCH TRANSACTION WAS TO BE ALLOWED [IN FAVOUR OF ASSESSEE] 7.11. WE FIND THAT THE HONBLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF CIT VS PIVET FINANCE LTD REPORTED IN (2010) 192 TAXMAN 21 DATED ITA NO. 4431/MUM/2004 M/S. LAXMIWADI MINES & MINERALS PVT. LTD., 20 23.4.201 0 HAD ALSO CONSIDERED THE ASPECT OF COLOURABLE DEVICE. THE HEAD NOTES OF THE SAID DECISION IS REPRODUCED HEREUNDER: - SECTION 4 OF THE INCOME - TAX ACT, 1961 - INCOME - CHARGEABLE AS - ASSESSMENT YEARS 2003 - 04 AND 2004 - 05 - ISSUE THAT CAME UP FOR CONSIDERATION BEFORE TRIBUNAL WAS WHETHER ASSESSEE HAD BEEN CONSISTENTLY RESORTING TO COLOURABLE DEVICE WITH OBJECT OF REDUCI NG TAX LIABILITY BY TRANSFERRING SHARES TO ANOTHER GROUP OF COMPANIES WITH A VIEW TO REDUCE TAXABLE INCOME - TRIBUNAL RECORDED A CATEGORICAL FINDING IN ASSESSEE'S FAVOUR CONCERNING GENUINENESS OF TRANSACTION INASMUCH AS TRANSACTION WAS AT THEN PREVAILING M ARKET RATE - WHETHER FINDING RECORDED BY TRIBUNAL WAS A FINDING OF FACT AND NO SUBSTANTIAL QUESTION OF LAW AROSE THEREFROM - HELD, YES 7.12. WE FIND THAT THE HONBLE GUJARAT HIGH COURT IN THE CASE OF ACIT VS BIRAJ INVESTMENT (P) LTD REPORTED IN (2012) 2 4 TAXMANN.COM 273 DATED 7.8.2012 HAD ALSO CONSIDERED THE ASPECT OF COLOURABLE DEVICE. THE HEAD NOTES OF THE SAID DECISION IS REPRODUCED HEREUNDER: - SECTION 2(47), READ WITH SECTION 45, OF THE INCOME - TAX ACT, 1961 - CAPITAL GAINS - TRANSFER - ASSESSMENT Y EAR 1993 - 94 - SHARES OWNED BY ASSESSEE IN COMPANY RM WERE PLEDGED BY ASSESSEE WITH A BANK - ORIGINAL SHARE CERTIFICATES ALONG WITH TRANSFER FORMS DULY SIGNED BY ASSESSEE WERE IN POSSESSION OF BANK - ASSESSEE HAD ALSO UNDERTAKEN NOT TO TRANSFER SUCH SHARES - HOWEVER, ASSESSEE ENTERED INTO AGREEMENT WITH PURCHASER COMPANY TO SELL SUCH PLEDGED SHARES AND GAVE IRREVOCABLE POWER OF ATTORNEY AND RECEIVED FULL SALE CONSIDERATION - WHETHER TRANSFER OF SHARES WAS COMPLETE BY VIRTUE OF SECTION 2(47) - HELD, YES [PARA 15] [IN FAVOUR OF ASSESSEE] SECTION 4 OF THE INCOME - TAX ACT, 1961 - TAX AVOIDANCE - ASSESSMENT YEAR BECAUSE 1993 - 94 - WHETHER BECAUSE SIMPLY ASSESSEE HAD SOLD SHARES TO GROUP COMPANY AT LOSS DURING PREVIOUS YEAR WHEN IT HAD ALSO SOLD SOME SHARES AT PROFI T, BY ITSELF, WOULD NOT MEAN THAT THIS WAS A CASE OF COLOURABLE DEVICE - HELD, YES [PARA 17] [IN FAVOUR OF ASSESSEE] 7.13. WE FIND THAT THE LD AR ALSO DISTINGUISHED ON FACTS THE VARIOUS CASE LAWS RELIED UPON BY THE REVENUE BEFORE US AS UNDER: - A) DECISI ON OF HONBLE GUJARAT HIGH COURT IN THE CASE OF PATEL CHEMICAL WORKS VS CIT REPORTED IN 134 TAXMAN 694 (GUJ) DATED 14.7.2003 THE HEAD NOTES OF THE SAID DECISION IS REPRODUCED HEREUNDER: - SECTION 143 OF THE INCOME - TAX ACT, 1961 - ASSESSMENT - ADDITIONS TO INCOME - ASSESSEE - FIRM EFFECTED SUBSTANTIAL PORTION OF ITS TOTAL SALES THROUGH ITS SISTER CONCERNS - PRICE AT WHICH GOODS WERE SOLD BY ASSESSEE TO SISTER CONCERNS WAS ITA NO. 4431/MUM/2004 M/S. LAXMIWADI MINES & MINERALS PVT. LTD., 21 MUCH BELOW PREVAILING MARKET PRICE - SUBSEQUENTLY, SISTER CONCERNS SOLD SAID GOODS ON SA ME DAY AND IN SAME LOT AT SUBSTANTIALLY HIGHER PRICE - ASSESSING OFFICER BY HOLDING THAT HUGE PROFIT WAS DIVERTED BY ASSESSEE - FIRM TO ITS SISTER CONCERNS BY ADOPTING AFORESAID MODUS OPERANDI, ADDED AMOUNT OF PROFIT MADE BY SISTER CONCERNS FROM THOSE TRANSA CTIONS TO PROFIT OF ASSESSEE - FIRM - TRIBUNAL ALSO CONFIRMED ORDER PASSED BY ASSESSING OFFICER - WHETHER ONCE IT WAS ESTABLISHED THAT PAYMENT OF TAX HAD BEEN AVOIDED BY ASSESSEE, THERE - AFTER, IT WAS NOT NECESSARY FOR TRIBUNAL TO ASCERTAIN WHETHER ANY LOSS W AS CAUSED TO REVENUE ON ACCOUNT OF NON - INCLUSION OF INCOME IN QUESTION IN ASSESSEES ASSESSMENT - HELD, YES - WHETHER, THEREFORE, TRIBUNAL WAS RIGHT IN INCLUDING IN ASSESSEES ASSESSMENT THAT AMOUNT OF PROFIT WHICH HAD BEEN TRANSFERRED BY ASSESSEE TO ITS S ISTER CONCERNS - HELD, YES (UNDERLINING PROVIDED BY US) B) DECISION OF HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS SANJEEV WOOLLEN MILLS REPORTED IN ( 2003) 264 ITR 68 (BOM) DATED 11.12.2002 THE HEAD NOTES OF THE SAID DECISION IS REPRODUC ED HEREUNDER: - SECTION 145, READ WITH SECTION 80HHC, OF THE INCOME - TAX ACT, 1961 - METHOD OF ACCOUNTING - VALUATION OF STOCK - ASSESSMENT YEARS 1992 - 93 AND 1993 - 94 - ASSESSEE VALUED CLOSING STOCK FOR FIRST YEAR AT MARKET RATE AT RS. 130 PER KG. WHILE OPEN ING STOCK WAS VALUED AT RS. 90 PER KG. - IN SECOND YEAR, OPENING STOCK WAS VALUED AT RS. 130 PER KG. AND THERE WAS NO CLOSING STOCK, THAT RESULTED IN ABNORMAL GROSS PROFIT RATIO OF 2054.60 PER CENT IN FIRST YEAR AND LOSS RETURN IN SECOND YEAR - ASSESSEES CONTENTION WAS THAT IT WAS FOLLOWING SAME SYSTEM OF ACCOUNTING FOR LAST SEVERAL YEARS - HELD, YES - WHETHER SINCE ENTIRE DEVICE ADOPTED BY ASSESSEE WAS TO INFLATE DEDUCTION UNDER SECTION 80HHC IN FIRST YEAR AND TO SUPPRESS PROFITS IN SECOND YEAR, ASSESSING OFFICER WAS JUSTIFIED IN APPLYING PRINCIPLE OF LOWER OF COST OR MARKET VALUE AND VALUING CLOSING STOCK OF 1992 - 93 AND OPENING STOCK OF 1993 - 94 AT RS. 90 PER KG. - HELD, YES C) DECISION OF HONBLE CALCUTTA HIGH COURT IN THE CASE OF CIT VS SHEKHAWATI RA JPUTANA TRADING CO. (P) LTD REPORTED IN (2000) 236 ITR 950 (CAL) DATED 17.4.1998 THE HEAD NOTES OF THE SAID DECISION IS REPRODUCED HEREUNDER: - SECTION 28(I) OF THE INCOME - TAX ACT, 1961 - BUSINESS LOSS/DEDUCTIONS - ALLOWABLE AS - ASSESSMENT YEAR 1982 - 83 - ASSESSEE - COMPANY SOLD SHARES OF COMPANIES G, B AND J TO ITS CHAIRMAN AT LOSS BUT SUBSEQUENTLY PURCHASED 2400 SHARES OF COMPANY G FROM ITS SHAREHOLDER AND RELATIVE OF CHAIRMAN AT HIGHER COST AND REPURCHASED SHARES OF COMPANY J AT LOWER PRICES - WHETHER SAL E OF SHARES OF COMPANIES G AND B BY ASSESSEE - COMPANY WAS MAINLY INTENDED TO BENEFIT ITS CHAIRMAN TO ACQUIRE CONTROL OVER THESE COMPANIES AND, THEREFORE, LOSS IN SAID TRANSACTION WAS NOT ALLOWABLE AS GENUINE BUSINESS LOSS - HELD, YES - WHETHER, WHERE NO EVI DENCE WAS PRODUCED SHOWING THAT THERE WAS NO OTHER PURCHASER OF QUOTED SHARES OF COMPANY J AND ASSESSEE - COMPANY REPURCHASED FROM ITS CHAIRMAN AT HIGHER PRICE FOLLOWING SALE AT LOWER PRICE, TRANSACTION WAS ITA NO. 4431/MUM/2004 M/S. LAXMIWADI MINES & MINERALS PVT. LTD., 22 ONLY TO ENABLE CHAIRMAN TO CLAIM SHORT - TERM CAPITAL GAIN AND, THEREFORE, NO BUSINESS LOSS COULD BE ALLOWED - HELD, YES - WHETHER, WHERE IN EACH TRANSACTION CHEQUES WERE ISSUED BY ASSESSEE - COMPANY AND ITS CHAIRMAN ON SAME DAY WITHOUT SUFFICIENT FUNDS IN THEIR RESPECTIVE BANK ACCOUNTS, NO ACTUAL MOVEMENT OF FUNDS TOOK PLACE BETWEEN ASSESSEE - COMPANY AND ITS CHAIRMAN AND, THEREFORE, TRANSACTIONS WERE SHAM AND NOT GENUINE - HELD, YES ON REFERENCE : HELD THE TRIBUNAL HAD FAILED TO TAKE INTO ACCOUNT MATERIAL FACTS ( I ) THAT THE SALE OF THE UNQUOTED SHARES OF COM PANIES G AND B AT A SUBSTANTIAL LOSS WAS MAINLY INTENDED TO BENEFIT ITS CHAIRMAN R TO ACQUIRE CONTROL OVER THE TWO COMPANIES AND, ACCORDINGLY, EVEN ASSUMING FOR ARGUMENTS SAKE THAT THE RELEVANT LOSS WAS A BUSINESS LOSS, THIS LOSS SHOULD BE DISALLOWED A S BEING ON CAPITAL ACCOUNT ; ( II ) THAT THE PROPRIETY OF THE ASSESSEE IN PURCHASING SHARES OF COMPANY G AT RS. 30 PER SHARE FROM A SHAREHOLDER AND A RELATIVE OF THE DIRECTOR WHEN THE FACT OF BREAK - UP OF THE VALUE OF THE SHARES WAS NIL, WAS IGNORED BY THE T RIBUNAL ; ( III ) THAT THERE WAS ABSOLUTELY NO ASPECT OF COMMERCIAL PRUDENCE INVOLVED IN SELLING THE UNQUOTED SHARES TO R AT A LOSS. THE TRIBUNAL MISSED THE FACT THE SAID SALE WAS EFFECTED SOLELY WITH THE OBJECT OF BENEFITING THE CHAIRMAN R TO GAIN CONTROL O VER THE OTHER TWO COMPANIES. ACCORDINGLY, THERE WAS NO SCOPE FOR CONSIDERING THE SAID ITEMS OF LOSS AS GENUINE BUSINESS LOSS ; ( IV ) THAT THE MAIN PURPOSE OF THE SALE OF SHARES AT RS. 20.50 PER SHARE TO R AND THE SUBSEQUENT REPURCHASE OF THE SAME FROM HIM A T RS. 17.50 PER SHARE APPEARED TO BE TO ENABLE R TO CLAIM SHORT - TERM LOSS UNDER THE HEAD CAPITAL GAIN IN RESPECT OF THE PURCHASE AND SALE OF SHARES BY HIM AND IN THIS PROCESS THE ASSESSEE ALSO HAD TRIED TO CLAIM THE BENEFIT OF THE LOSS FOR THE ASSESSMENT YEAR 1982 - 83. THIS ARRANGEMENT HAD THE CHARACTER OF A WELL - PLANNED SCHEME FOR TAX AVOIDANCE; AND ( V ) THAT FURTHER CONSIDERATION SHOULD HAVE BEEN GIVEN TO THE FACT THAT NO ACTUAL MOVEMENT OF FUNDS TOOK PLACE FROM THE ASSESSEE TO R AND THE CHEQUES WERE ISS UED BY EACH OF THEM WITHOUT SUFFICIENT FUNDS IN THEIR RESPECTIVE BANK ACCOUNTS WHICH SHOWED THAT THE TRANSACTION WAS SHAM AND NOT GENUINE. THE TRIBUNAL ALSO DID NOT CONSIDER ALL THE POINTS OF OBJECTION MENTIONED BY ITO OR THE COMMISSIONER (APPEALS) NOR HAD DEALT WITH THE SAME. THE TRIBUNAL MAINLY BASED ITS FINDING ON THE GROUND THAT THE CONSIDERATION WAS RECEIVED THROUGH CHEQUE AND WAS DULY CREDITED IN THE BANK ACCOUNT OF THE ASSESSEE. THE TRANSACTION IN THE INSTANT CASE BEING BETWEEN THE ASSESSEE - COMPANY AND ITS CHAIRMAN, THE ONUS LAY HEAVILY ON THE ASSESSEE TO PROVE THAT THE TRANSACTION WAS GENUINE WHICH WAS NOT DISCHARGED BY THE ASSESSEE. CHEQUES WERE ISSUED SIMULTANEOUSLY BY THE PARTIES IN FAVOUR OF EACH OTHER FOR PURCHASE AND RE - PURCHASE ON THE SAME DA Y WITHOUT BOTH THE PARTIES HAVING SUFFICIENT FUNDS IN THE BANK, THAT ITSELF SHOWED THAT THE TRANSACTION WAS NOT GENUINE. THIS ASPECT, HOWEVER, COULD NOT BE EXPLAINED BY THE ASSESSEE. REGARDING SALE OF SHARES OF THREE COMPANIES, PARTICULARLY COMPANY J, NO EVIDENCE WAS PRODUCED ON BEHALF OF THE ASSESSEE THAT THERE WAS NO OTHER BUYER OF THE SHARES EXCEPT R, ITS CHAIRMAN, ALTHOUGH THOSE SHARES WERE QUOTED IN THE STOCK EXCHANGE. ITA NO. 4431/MUM/2004 M/S. LAXMIWADI MINES & MINERALS PVT. LTD., 23 THE FACT THAT SALE THROUGH BROKER OF LISTED SHARES WAS ESSENTIAL UNDER THE SECURIT IES CONTRACTS (REGULATION) ACT, 1956 AND IT WAS NOT DONE IN THE INSTANT CASE, WAS ALSO IGNORED BY THE TRIBUNAL. THE TRIBUNAL FAILED TO TAKE NOTE OF THE FACT THAT THE ASSESSEE - COMPANY AND R TRIED TO CLAIM LOSS IN THEIR RESPECTIVE ASSESSMENTS FOR TAX AVOID ANCE BY FICTITIOUS TRANSACTIONS. THEREFORE, THE ORDER OF THE TRIBUNAL WAS PERVERSE AND THE ASSESSEES CLAIM WAS DISALLOWED ACCORDINGLY. D) DECISION OF HONBLE SUPREME COURT IN THE CASE OF CIT VS S.P.JAIN REPORTED IN (1973) 87 ITR 370 (SC) . WE FIND TH AT THIS DECISION HAS ALREADY BEEN CONSIDERED BY THE HONBLE CALCUTTA HIGH COURT IN 236 ITR 950 SUPRA. 7.14. HENCE WE HOLD THAT THERE IS NO EVIDENCE ON RECORD TO TREAT THE PURCHASE AND SALE TRANSACTIONS OF THE ASSESSEE AS SHAM AND A DEVICE ADOPTED IN ORD ER TO EVADE PAYMENT OF TAX. IT IS NOT IN DISPUTE THAT THE ASSESSEE AFTER SETTING OFF THE LOSS OF RS 5.18 CRORES WITH THE LONG TERM CAPITAL GAIN OF RS 7.73 CRORES ON SALE OF SHARES OF BAJAJ AUTO LTD , HAD DULY PAID TAXES THEREON ALONG WITH THE RETURN OF IN COME. IN OUR CONSIDERED OPINION, THERE IS NO TAX EVASION BY THE ASSESSEE IN THE FACTS OF THE INSTANT CASE. WE REITERATE THAT THE BUSINESS PRUDENCE OF MAKING INVESTMENT IN PREFERENCE SHARES AT THE TIME OF CRISIS TO PROTECT THE INTERESTS OF THE GROUP COMPANY I.E M/S SOIL CANNOT BE QUESTIONED BY THE REVENUE. 7.15. IN VIEW OF OUR AFORESAID FINDINGS AND RESPECTFULLY FOLLOWING THE JUDICIAL PRECEDENTS RELIED UPON HEREINABOVE WHICH ARE APPLICABLE TO THE FACTS AND CIRCUMSTANCES OF THE INSTANT CASE BEFORE US, WE H OLD THAT THE LD CITA ERRED IN CONFIRMING THE DISALLOWANCE OF CAPITAL LOSS OF RS 5.18 CRORES ON SALE OF PREFERENCE SHARES AND CONSEQUENTIALLY DENYING THE SET OFF OF THE SAME WITH LONG TERM CAPITAL GAINS. ACCORDINGLY, THE GROUNDS RAISED BY THE ASSESSEE ARE A LLOWED. ITA NO. 4431/MUM/2004 M/S. LAXMIWADI MINES & MINERALS PVT. LTD., 24 7.16. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 20 / 02 /201 9 SD/ - ( RAM LAL NEGI ) SD/ - ( M. BALAGANESH ) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI ; DATED 20 / 02 /201 9 KARUNA SR. PS COPY OF THE ORDER FORWARDED TO : BY ORDER, ( ASSTT. REGISTRAR) ITAT, MU MBAI 1. THE APPELLANT 2. THE RESPONDENT. 3. THE CIT(A), MUMBAI. 4. CIT 5. DR, ITAT, MUMBAI 6. GUARD FILE. //TRUE COPY//