DCIT, New Delhi V. M/s. Ratna Commercial Enterprises P. Ltd., New Delhi

ITA 5091/DEL/2011

• Counselvise Citation: [2013] 140 COUNSELVISE.COM (IT) 69245 (ITAT-DELHI)
• Duration Of Justice: 1 year(s) 9 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-08-2013
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: F
• Next Hearing Date: 21-08-2013
• Assessment Year: 2008-2009
• Appeal Filed On: 15-11-2011
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: VEENA JOSHI
• Keywords: Fair market value; Valuation report
• Section: 56

Judgement Text

ITA NO. 5091/DEL/2011 1 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH F, NEW DELHI BEFORE SHRI RAJPAL YADAV, JUDICIAL MEMBER AND SHRI SHAMIM YAHYA, ACCOUNTANT MEMBER I.T.A. NO. 5091 /DEL/201 1 A.Y. : 2008-09 DCIT, CIRCLE-15(1), ROOM NO. 412, C.R. BLDG., I.P. ESTATE, NEW DELHI VS. M/S RATNA COMMERCIAL ENERPRISE P. LTD., 4 TH FLOOR, PUNJABI BHAVAN, 10 ROUSE AVENUE, NEW DELHI (PAN : AAACR0354B) (APPELLANT) (APPELLANT) (APPELLANT) (APPELLANT) (RESPONDENT) (RESPONDENT) (RESPONDENT) (RESPONDENT) ASSESSEE BY : SH. M.P. RASTOGI, ADV. DEPARTMENT BY : SMT. VEENA JOSHI, C.I.T. (D.R.) ORDER ORDER ORDER ORDER PER SHAMIM YAHYA: AM PER SHAMIM YAHYA: AM PER SHAMIM YAHYA: AM PER SHAMIM YAHYA: AM THIS APPEAL BY THE REVENUE IS DIRECTED AGAINST TH E ORDER OF THE LD. COMMISSIONER OF INCOME TAX (APPEALS)-XVIII, NEW DELHI DATED 18.8.2011 PERTAINING TO ASSESSMENT YEAR 2008- 09. 2. THE GROUNDS RAISED READ AS UNDER:- 1. THE LD. COMMISSIONER OF INCOME TAX (A) HAS ERR ED IN LAW AND ON FACTS IN ALLOWING CLAIM OF LOSS OF RS . 32,19,82,850/- ON ACCOUNT OF SALE OF SHARES. 2. THAT THE LD. COMMISSIONER OF INCOME TAX (A) HAS FAILED TO LIFT THE CEIL AND ASCERTAIN THE TRUTH WHE REAS ITA NO. 5091/DEL/2011 2 THE FACTS CLEARLY INDICATE THAT IN GENUINE TRANSACT ION IS GIVEN TO COLOR. 3. THE APPELLANT CRAVES TO BE ALLOWED TO ADD ANY F RESH GROUNDS OF APPEAL AND/OR DELETE OR AMEND ANY OF THE GROUND OF APPEAL. 3. IN THIS CASE THE ASSESSEE COMPANY IS ENGAGED IN THE BUSINESS OF TRADING IN UNITS OF MUTUAL FUNDS AND INVESTMENT IN SHARES AND DEBENTURES ETC. THE ASSESSEE COMPANY HAD BOUGHT 1 6,06,975 EQUITY SHARES AND 14,70,000 PREFERENCE SHARES OF M/ S SANAT PRODUCTS LTD. DURING F.Y. 2005-06. THE SAID EQUITY S HARES AND PREFERENCE SHARES HAVING FACE VALUE OF RS. 100/- PE R SHARE HAD BEEN BOUGHT BY THE ASSESSEE AT RS. 97.60 PER EQUITY SHAR E AND RS. 100/- PER PREFERENCE SHARE. THE SAID SHARES WERE SOLD BY T HE ASSESSEE COMPANY TO SHRI PRADEEP BURMAN AT RE. 0.10 PER EQUI TY SHARE AND RS. 10/- PER PREFERENCE SHARE DURING F.Y. 2007-08, RESULTING IN A LONG TERM CAPITAL LOSS OF RS. 32,19,82,850/- WHICH THE A SSESSEE HAS SOUGHT TO CARRY FORWARD TO FUTURE YEARS AS PER THE RETURN OF INCOME FILED FOR A.Y. 2008-09. THE AO HAS OBSERVED THAT SHR II PRADEEP BURMAN WAS A MAJORITY SHAREHOLDER OF THE ASSESSEE C OMPANY AND WAS THE CHAIRMAN OF M/S SANAT PRODUCTS LTD. DURING THE YEAR UNDER CONSIDERATION. ON BEING ASKED REGARDING THE SALES P RICE OF THE SHARES, IT WAS EXPLAINED BY THE ASSESSEE THAT THE S ALE PRICE WAS DECIDED KEEPING IN VIEW THE BOOK VALUE OF RS. (-) 6 7.79 PER SHARE OF M/S SANAT PRODUCTS LTD. AS ON 31.03.2007. THE ASSESS EE ALSO FURNISHED A VALUATION CERTIFICATE DATED 28.11.2007 FROM M/S V. AHUJA & CO., CAS IN THIS REGARD. HOWEVER, THE AO HAS OBSE RVED THAT THE FINANCIAL POSITION. OF M/S SANAT PRODUCT LTD. IS ALMOST THE SAME DURING THE YEAR OF PURCHASE AND YEAR OF SALE. THE A O ALSO WORKED OUT THE BOOK VALUE OF EQUITY SHARE OF M/S SANAT PRO DUCT LTD. AS ON 31.03.2005 AT RS. (-)117.39. THE AO HAS, THEREAFTER , HELD THAT THE ITA NO. 5091/DEL/2011 3 TRANSACTION IN THE ABOVE SHARE WAS A COLOURABLE DEV ICE TO CLAIM LONG TERM CAPITAL LOSS ON SALE OF SHARES BY SELLING THE SHARES AT A MEAGER VALUE TO BENEFIT ITS DIRECTOR. THE AO HAS CITED THE DECISION IN THE CASE OF MC. DOWELL & CO. 145 ITR 148 (SC) AND SOME OTHER CASE LAWS REGARDING LIFTING OF CORPORATE VEIL AND HAS DISALLO WED THE LONG TERM CAPITAL LOSS AND CARRY FORWARD OF THE SAME. 4. UPON ASSESSEES APPEAL LD. COMMISSIONER OF INCO ME TAX (A) NOTED THAT ASSESSEE HAS BOUGHT THE SHARES OF GRO UP COMPANY AND HELD THEM FOR MORE THAN 3 YEARS BEFORE SELLING IT. HE FURTHER OBSERVED THAT THE LONG TERM LOSS INCURRED IN THE ABOVE TRANSACTION HAS ALSO NOT BEEN SET OFF BY THE ASSESSEE AGAINST A NY CAPITAL GAIN DURING THE YEAR UNDER CONSIDERATION AND ONLY SOUGHT TO BE CARRY FORWARD. THAT THE ENTIRE TRANSACTION HAS BEEN DONE THROUGH BANKING CHANNEL AND HAS BEEN DULY RECORDED IN THE BOOKS OF ACCOUNTS AND AUDITED STATEMENT OF ACCOUNTS. THAT THE ASSESSING O FFICER HAS NEITHER QUESTIONED THE VALUATION OF SHARES MADE BY THE INDEPENDENT VALUER NOR HE HAS QUESTIONED THE GENUINENESS OF P URCHASE AND SALE OF SHARES AT THE PRICES MENTIONED. THAT THERE IS N OTHING ON RECORD TO SUGGEST ANY COLLUSION BETWEEN THE PARTIES CONCE RNED OR ANY BASIS TO TERM THE TRANSACTION AS SHAM. LD. COMMIS SIONER OF INCOME TAX (A) FURTHER REFERRED TO THE DECISION OF THE IT AT, KOLKATA IN THE CASE OF ACIT VS. TURNER MORRISSON & CO. LTD. (1993 ) 47 ITD 638 (CAL.) AND HONBLE APEX COURT DECISION IN THE CASE OF C.I.T. VS. WALFORT SHARE AND STOCK BROKERS (P) LTD. 326 ITR 1 - SC 2010. 4.1 CONSIDERING THE ABOVE, LD. COMMISSIONER OF INCO ME TAX (A) HELD THAT HE FOUND THAT THE DISALLOWANCE MADE BY TH E ASSESSING OFFICER WAS WITHOUT SOUND BASIS AND HENCE CANNOT B E SUSTAINED. HENCE, HE HELD THAT ASSESSEE WILL BE ENTITLED TO BE NEFIT OF CARRY FORWARD OF LONG TERM CAPITAL LOSS AS PER LAW. ITA NO. 5091/DEL/2011 4 5. AGAINST THE ABOVE ORDER THE REVENUE IS IN APPEAL BEFORE US. 6. WE HAVE HEARD BOTH THE COUNSEL AND PERUSED THE R ECORDS. LD. DEPARTMENTAL REPRESENTATIVE RELIED UPON THE ORDER O F THE ASSESSING OFFICER. LD. DEPARTMENTAL REPRESENTATIVE FURTHER S UBMITTED THAT IN THIS CASE THE LD. COMMISSIONER OF INCOME TAX (A) HA S DELETED THE DISALLOWANCE, BUT HAS NOT MADE OUT ANY EFFORT TO FI ND OUT THE REAL WORTH OF THE SHARES. HENCE, SHE SUBMITTED THAT LD. COMMISSIONER OF INCOME TAX (A)S ORDER IS NOT SUSTAINABLE. 6.1 LD. COUNSEL OF THE ASSESSEE ON THE OTHER HAND SUBMITTED THAT THE VALUATION OF THE SHARES IN THIS CASE HAS BEEN D ONE BY THE INDEPENDENT VALUER ON PROPER BASIS. HE FURTHER SUBM ITTED THAT THE TRANSACTIONS IS PERFECTLY LEGAL. HE FURTHER SUBMITT ED THAT THE ASSESSEE HAS PAID TAXES FOR THE CONCERNED ASSESSMEN T YEAR U/S. 115 JB. HE FURTHER SUBMITTED THAT THE ASSESSEE COMPANY HAS NOT CLAIMED ANY ADJUSTMENT OF CAPITAL LOSS AGAINST THE CAPITAL GAINS. HENCE, NO MALAFIDE MOTIVE CAN BE ATTRIBUTED TO THE ASSESSEE. LD. COUNSEL OF THE ASSESSEE FURTHER REFERRED TO INCOME TAX RULE 11UA(1B) REGARDING THE DETERMINATION OF FAIR MARKET VALUE AND SUBMITTED THAT THE VALUATION DONE BY THE ASSESSEE I S NOT IN VIOLATION OF THE ABOVE. LD. COUNSEL FURTHER REFERRED TO SCHED ULE-III, PART-C OF THE WEALTH TAX PERTAINING TO THE VALUATIONS OF SHAR ES. LD. COUNSEL FURTHER RELIED UPON THE DECISION OF THE DELHI HIGH COURT IN THE CASE OF C.I.T. VS. GILLETTE DIVERSIFIED OPERATIONS P. LT D. 324 ITR 226 (DELHI) AND THE DECISION OF THE HONBLE APEX COURT DECISI ON IN THE CASE OF C.I.T. VS. WALFORT SHARE AND STOCK BROKERS (P) LTD. 326 ITR 1- SC 2010 AND ALSO THE DECISION OF ITAT, KOLKATA IN THE CASE OF ACIT VS. TURNER MORRISSON & CO. LTD. (1993) 47 ITD 638 (CAL. ). ACCORDINGLY, LD. COUNSEL OF THE ASSESSEE SUBMITTED THAT THE DISALLOW ANCE IN THIS CASE HAS BEEN RIGHTLY DELETED BY THE LD. COMMISSIONER OF INCOME TAX (A). ITA NO. 5091/DEL/2011 5 7. WE HAVE CAREFULLY CONSIDERED THE SUBMISSIONS. IN THIS CASE THE ASSESSEE COMPANY HAD BOUGHT 16,06,975 EQUITY SHARE S AND 14,70,000 PREFERENCE SHARES OF M/S SANAT PRODUCTS LTD. DURING F.Y. 2005-06. THE SAID EQUITY SHARES AND PREFERENCE SHARE S HAVING FACE VALUE OF RS. 100/- PER SHARE HAD BEEN BOUGHT BY THE ASSESSEE AT RS. 97.60 PER EQUITY SHARE AND RS. 100/- PER PREFERENCE SHARE. AS PER THE VALUATION OF SHARES COMPUTED BY THE ASSESSING O FFICER BOOK VALUE PER SHARE WAS (-) 117.39. 7.1 THE SAID SHARES WERE SOLD BY THE ASSESSEE COMPA NY TO SHRI PRADEEP BURMAN AT RE. 0.10 PER EQUITY SHARE AND RS. 10/- PER PREFERENCE SHARE. THE ASSESSEE SUBMITTED VALUATION OF THESE SHARES BY THE CHARTERED ACCOUNTANT GIVING THE VALUE OF EQ UITY SHARES OF M/S SANAT PRODUCTS LTD. AS ON 31.3.2007 AT RS. (-) 67.79. THIS TRANSACTION OF THE ASSESSEE RESULTED IN A LONG TERM CAPITAL LOSS OF RS. 32,19,82,250/- WHICH THE ASSESSEE SOUGHT TO CARRY FORWARD TO FUTURE YEARS. THE ASSESSING OFFICER IN THIS REG ARD HAS NOTED THAT SH. PRADEEP BURMAN WAS A MAJORITY SHARE HOLDER OF THE ASSESSEE COMPANY AND WAS A CHAIRMAN OF M/S SANAT PRODUCTS L TD. DURING THE YEAR UNDER CONSIDERATION. ASSESSING OFFICER HA S OBSERVED THAT THE FINANCIAL POSITION OF M/S SANAT PRODUCTS LTD. IS ALMOST THE SAME DURING THE YEAR OF PURCHASE AND YEAR OF SALE. IN TH ESE CIRCUMSTANCES, ASSESSING OFFICER HAS HELD THAT TRA NSACTION IN THE ABOVE SHARES WAS A COLOURABLE DEVICE TO CLAIM LONG TERM CAPITAL LOSS ON THE SALE OF SHARES BY SELLING THE PRICE AT A MEA GER VALUE TO BENEFIT ITS DIRECTOR. 7.2 WE FIND THAT IN THIS CASE THE BOOK VALUE OF THE SE SHARES AT THE TIME OF PURCHASE WAS RS. (-) 117.39 AS ON 31.3.2005 . IN A.Y. 2008- 09 THE VALUE OF THESE SHARES AS WORKED OUT BY THE C HARTERED ACCOUNTANT WAS (-) 67.79 PER SHARE. WE FIND THAT TH E VALUATION OF THE SHARES AT BOTH THE TIMES WAS NEGATIVE. ON A QUERY FROM THE BENCH ITA NO. 5091/DEL/2011 6 THAT WHEN THE BOOK VALUE WAS (-) 117.39 WHAT WAS THE RATIONALE BEHIND THE ASSESSEE COMPANY TO PURCHASE THOSE SHAR ES AT RS. 97.60 PER EQUITY SHARE, LD. COUNSEL OF THE AS SESSEE REPLIED THAT THE ASSESSEE WAS IMPRUDENT WHILE MAKING THE PURCHA SE. THUS, WE FIND THAT WHEN THE BOOK VALUE OF THE SHARES WAS (-) 117.39, THE SHARES WERE PURCHASED BY THE ASSESSEE AT RS. 97.60 PER SHARE FOR EQUITY SHARE AND RS. 100/- FOR PREFERENCE SHARE. HOWEVER, WHEN THE SAME WERE HAVING THE BOOK VALUE AT RS. (-) 67. 60 PER UNIT, BUT THE SALE WAS MADE AT RS. 0.10 PER EQUITY SHARE AND RS. 10 PER PREFERENCE SHARE. WE FIND THAT THERE IS NO PROPER JUSTIFICATION IN THE ACTION OF THE ASSESSEE IN THIS REGARD. LD. COUNSEL OF THE ASSESSEES RELIANCE UPON RULE 11UA(1B) REGARDING THE DETERMINATION OF FAIR MARKET VALUE IS NOT GERMANE AS THIS RULE IS FOR THE PURPOSE OF SECTION 56 OF THE ACT AND IS NOT APPLICABLE, WHEN THE MARKET VALUE OF SHARES BEING SOLD HAS TO BE CONSIDERED. ON SIMILAR ANALOGY PROVISION OF SCHED ULE III, PART-C OF THE ACT ARE ALSO NOT APPLICABLE. THE DECISION OF THE DELHI HIGH COURT IN THE CASE OF C.I.T. VS. GILLETTE DIVERSIFI ED OPERATIONS P LTD. (SUPRA) ARE ALSO NOT APPLICABLE, AS THE DECISION WA S BASED UPON THE FINDING OF THE FACT OF THE ITAT. IT WAS FURTHER NO TED THAT IN THAT CASE THE SHARES WERE NOT SOLD AT A PRICE WHICH WAS HIGHE R OR LOWER THAN THE FAIR PRICE. IN THIS CASE, WE FIND THAT FAIR PRICE OF THE SHARES ITSELF ARE A MATTER OF DISPUTE. THE DECISION OF TH E ITAT IN THE CASE OF ACIT VS. TURNER MORRISSON & CO. LTD. (SUPRA) I S ALSO NOT APPLICABLE AS IN THAT CASE THERE WAS NO DISPUTE RE GARDING THE VALUATION OF THE SHARES. IN THIS CASE WE FIND THA T THE DISPUTE RELATES TO VALUATION OF SHARES AT THE TIME OF PURCHASE AS W ELL AS SALE. THE DECISION OF THE HONBLE APEX COURT IN THE CASE OF C.I.T. VS. WALFORT SHARE AND STOCK BROKERS (P) LTD. IS ALSO NOT APPLIC ABLE AS THAT CASE RELATED TO DIVIDEND STRIPING TRANSACTION. ITA NO. 5091/DEL/2011 7 7.3 IN THIS CASE WE FIND THAT AS PER THE VALUATION REPORT FILED BY THE ASSESSEE REGARDING THE VALUATION OF SHARES AS ON 31 .3.2007 FOLLOWING WAS NOTED :- NET WORTH NET WORTH NET WORTH NET WORTH AMOUNT (RS.) AMOUNT (RS.) AMOUNT (RS.) AMOUNT (RS.) TOTAL ASSETS TOTAL ASSETS TOTAL ASSETS TOTAL ASSETS FIXED ASSETS 1,005.65 INVESTMENT 10.33 NET CURRENT ASSETS 1,944.00 2,959.98 2,959.98 2,959.98 2,959.98 LESS : LIABILITIES LESS : LIABILITIES LESS : LIABILITIES LESS : LIABILITIES SECURED LOAN 1,500.48 PREFERENCE SHARE CAPITAL 1,500.00 UNSECURED LOAN 1,112,05 4,112,53 NET WORTH (1,152.55) NO. OF SHARES IN LACS 17.00 VALUE PER SHARE - 67.79705882 7.4 WE FIND THAT THERE IS NO DETAIL IN THIS REGARD REGARDING THE FIXED ASSETS AND CURRENT ASSETS. FURTHERMORE, THER E IS NO FINDING THAT WHAT WAS THE MARKET VALUE OF THE FIXED ASSETS AND THE CURRENT ASSETS. NO EXAMINATION IN THIS REGARD HAS BEEN DON E BY THE ASSESSING OFFICER AND THE LD. COMMISSIONER OF INCO ME TAX (A). IN OUR CONSIDERED OPINION, THE MARKET VALUE OF THE ASS ETS OF THE COMPANY IN THIS CASE HAS A DIRECT BEARING ON THE VA LUATION OF SHARES ITA NO. 5091/DEL/2011 8 AS ON THE DATE OF SALE. WE FURTHER NOTE THAT AUTHO RITIES BELOW HAVE NOT MADE OUT ANY OTHER EFFORTS TO FIND OUT THE VALU E / FAIR PRICE OF THE SHARES AS ON THE DATE OF SALE. IN OUR CONSIDERED O PINION, THE ABOVE IS VERY ESSENTIAL FOR PROPER ADJUDICATION IN THIS C ASE. IN THIS REGARD, WE NOTE THAT HONBLE APEX COURT IN THE CASE OF KAPU RCHAND SHRIMAL VS. CIT, 131 ITR 451, HAS HELD THAT IT IS THE DUTY OF THE APPELLATE AUTHORITY TO CORRECT THE LACUNA IN THE ORDER OF THE AUTHORITIES BELOW. UNDER THE CIRCUMSTANCES, IN THE BACKGROUND OF THE A FORESAID DISCUSSIONS AND PRECEDENTS, WE SET ASIDE THE ISSUE RAISED IN THE APPEAL TO THE FILE OF THE ASSESSING OFFICER. THE A SSESSING OFFICER SHALL EXAMINE THE CASE AFRESH BY BRINGING ON RECORD THE FAIR PRICE OF THE SHARES IN THIS CASE AND DECIDE ACCORDINGLY. 8. IN THE RESULT, THE APPEAL FILED BY THE REVENUE S TANDS ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 23/8/2013. SD/- SD/- [ [[ [RAJPAL YADAV RAJPAL YADAV RAJPAL YADAV RAJPAL YADAV] ]] ] [SHAMIM YAHYA] [SHAMIM YAHYA] [SHAMIM YAHYA] [SHAMIM YAHYA] JUDICIAL MEMBER JUDICIAL MEMBER JUDICIAL MEMBER JUDICIAL MEMBER ACCOUNTANT MEMBER ACCOUNTANT MEMBER ACCOUNTANT MEMBER ACCOUNTANT MEMBER DATE 23/8/2013 SRBHATNAGAR SRBHATNAGAR SRBHATNAGAR SRBHATNAGAR COPY FORWARDED TO: COPY FORWARDED TO: COPY FORWARDED TO: COPY FORWARDED TO: - -- - 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. DR, ITAT TRUE COPY BY ORDER, ASSISTANT REGISTRAR, ITAT, DELHI BENCHES ITA NO. 5091/DEL/2011 9