If transaction is sham, it cannot be considered as tax
planning
Supreme Court makes it very clear that a colourable device
cannot be a part 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 part 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
McDowell (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
term capital loss was found as a matter of fact by all the three authorities to
be a sham.
HIGH COURT OF BOMBAY
INCOME TAX APPEAL NO.55 18 OF 2010
Killick Nixon Limited Vs. DCIT
Dated – 06th march 2012
JUDGMENT: (Per M.S.SANKLECHA, J.)
This appeal by the assessee under Section 260A of the Income
Tax Act, 1961 raises the following questions of law:
i) Whether on the facts and in the circumstances of the case
and in law, the Tribunal was in error in confirming the additions projected in
questions (ii) to (vi) in infringement of the principles of natural justice and
fair play?
ii) Whether on the facts and in the circumstances of the
case and in law, the Tribunal was justified in confirming the disallowance of
short term and long term capital losses arising out of the sale of shares of
Matterhorn Investment Ltd, Mountblanc Investments Ltd, Fircrest Investment Pvt.
Ltd. and Galactia Investments Ltd?
iii) Whether on the facts and in the circumstances of the
case and in law, the Tribunal was correct in approving the disallowance of
short term loss Rs.3,09,26,000/- in connection with the sale of shares of
Killick Halco Limited?
iv) Whether on the facts and in the circumstances of the
case and in law, the Tribunal was right in affirming the conversion of the
above mentioned short term loss Rs. 3,09,26,000/- projected in question no
(iii) into a short gain Rs.80,80,540/-?
v) Whether on the facts and in the circumstances of the case
and in law, the Tribunal was right in ratifying the disallowance of the long
term capital loss Rs. 1,68,37,861/- emanating from the sale of shares of
Pelican Paints Ltd?
vi) Whether on the facts and in the circumstances of the
case, the Tribunal misdirected itself in law in sanctioning the rejection of
the business loss Rs.105 crores emerging from the Appellant's business of
providing guarantees? and
vii) Whether on the facts and in the circumstances of the
case and in law, the Tribunal's order dated 06.04.2010 is perverse, contrary to
weight of evidence adduced by the Appellant and founded on irrelevant
considerations and therefore, all its conclusions, findings and holdings are
vitiated and plagued by infirmities inasmuch as no person acting judicially and
properly instructed as to the relevant law would have come to the inferences
arrived by the Tribunal insofar as questions (i) to (vi) supra are concerned?
2 Counsel for the Appellant submitted at the out set that
the order of the Income Tax Appellate Tribunal dated 6 April 2010 needs to be
set aside and the proceedings remanded for fresh consideration, as theTribunal
has relied upon a decision of the Supreme Court in Sumati Dayal reported in
(1995) 214 ITR 801 (SC) without any party to the proceedings relying upon the
same before the Tribunal. Consequently, it is submitted by Counsel that there
was a violation of the principles of natural justice. It was submitted that the
Appellant would have been able to distinguish the applicability of the decision
to the facts of its case.
3 During the course of the hearing, we had suggested to
Counsel for the Appellant that since it is settled law that what is recorded in
the order of the Court is normally accepted as correct record of what
transpired at the hearing, therefore, if the Appellant is of the view that that
the impugned order does not reflect the proceedings before the Tribunal
correctly then in such a case he may move the Tribunal either by an application
for rectification or review. This was particularly in view of the fact that the
Appellant was represented by different Counsel before the Tribunal. However,
the learned Counsel for the Appellant informed us that he would press this
appeal and was not inclined to move the Tribunal by way of application for
rectification and/or review.
4 In view of the above, the appeal was taken up for
consideration. The facts leading to this appeal are as under :
(a) On 31 October 2001, the Appellant filed its return of
income declaring a total loss of Rs.26.87 lakhs for assessment year 200 1-02.
In its return the Appellant had claimed long term capital gain of Rs.49.72
crores, being the profit earned on the sale of land. This land was sold to
Vysya Bank Ltd. to discharge the Appellant's liability as a guarantor for loans
advanced by Vysya Bank Ltd. to Geekay Exim (India) Ltd. a company belonging to
G. K. Rathi Group. The appropriate authority had issued a certificate on 7
February 2000 under the Urban Land Ceiling Act, granting its no objection to
the transfer of the land by the Appellant to Vysya Bank Ltd. The capital gain
on the sale of land was set off by a long term capital loss and short term
capital loss of Rs.1.45 crores and of Rs.49.73 crores respectively on account
of sale of shares. The Assessing Officer doubted the genuineness of the capital
loss/gain on account of shares and therefore, inter alia called upon the
appellant to explain, why the losses on account of shares should not be
disallowed, as they appeared to be sham. The Assessing Officer has on
investigation of facts, found that during a period of three days from 28 March
2000 to 30 March 2000 the Appellant company which was otherwise a cash starved
company, decided to invest a sum of Rs.48 crores in four companies i. e.
Matterhorn Investments (P) Ltd., Mountblance Investments (P) ltd., Fircast
Investments (P) ltd and Galactia Investments (P) Ltd which were its 100 per
cent subsidiaries by subscribing to its shares at a premium. The share held
prior to 28 March 2000 and the further purchase of shares at a premium during
the period 28 March 200 to 30 March 2000 are as under :
Sr No Name of the party Amount (including premium
of Rs.140) No. of shares subscripti on (during the F.Y. 1999-2000)
31.3.92
(100% Holding)
31.3.90
(100% Holding)
Total holding of Killick Nixon Ltd.
Capital % holding
1 Matterhorn
Investments Pvt. Ltd. 12.03 Cr. 800000 149998
2 950000 100%
2 Montblanc Investments Pvt. Ltd. 12.03 Cr. 800000 149998 2 950000
100%
3 Fircrest Investment Pvt. Ltd. 12.03 Cr. 800000 149998 2 950000
100%
4 Galactica Investment Ltd. 12.03 Cr. 800000 149998 2 950000
100%
4 8.12 Cr.
This amount of Rs.48/- crores came into the hands of the
Appellant company from one G.K.Rathi Group which consisted of the following
entities making the following contribution to the Appellant company:
1 GKAK Rathi HUF 34.87
crores (28/3 to 30/3)
2 Subahu Investment Ltd. 5.50 crores (28/3)
3 Viplav Trading Ltd. 1.30 crores (30/3)
4 Kosha Investments (balances) 6.325 crores (29/3/00)48.00
crores
The Assessing Officer also noted the fact that the G. K.
Rathi Group was the same person in favour of whose company, the Appellant had
given the guarantee to Vysya Bank Ltd. which ultimately led to sale of land to
Vysya Bank Ltd. resulting in a capital gain of Rs.49.73 crores to the
Appellant. The amount invested by the Appellant in the aforesaid four
subsidiary companies viz. Matterhorn Investments (P) Ltd., Mountblance
Investments (P) Ltd., Fircast Investments (P) Ltd and Galactia Investments (P)
Ltd (hereinafter referred to as the four subsidiary companies) was transferred
by the four companies during the period 1 March 2000 to 31 March 200 to a
company called Kosha Investments Ltd. which was a part of the G.K. Rathi group.
(b) The amount of Rs.48 crores invested in the four
subsidiary companies was invested at a premium of Rs.140/-per share with the
face value of the share being Rs. 10/-. Therefore, the Appellant purchased
shares of all the four subsidiary companies at a price of Rs.150/- per share.
The amount raised by the four subsidiary companies were transferred to a
company belonging to G. K. Rathi namely Kosha Investments Private Ltd. by 31
March 2000. It was therefore found that the money which came from G.K.Rathi
Group amounting to Rs.48 crores during the period from 28 March 2000 to 30
March 2000 was again transferred back to G.K.Rathi Group, as investment, by the
four subsidiary companies of the Appellant before 31 March 2000. The four
subsidiary companies into which the Appellant had invested at a premium of
Rs.140/- per share were valued at less than Rs.23/- per share on price earning
capacity and in fact negative when valued on Net Value Basis. The Assessing
Officer has recorded in his order that the average price of shares in the four
subsidiary companies was less than Rs.25/- per share. Therefore, the investment
at a premium of Rs. 140/- per share was found to be inexplicable. When enquired
of the reason, why the Appellant invested at such a high premium in the four
subsidiary companies, the Appellant informed the Assessing Officer that it was
hopeful of the prospects of its four subsidiary companies and therefore
invested the amount in those four companies at a premium of Rs.140/- per share.
The investment of the four subsidiary companies into Kosha Investment, which
was consistently suffering losses from 1997 onwards was only to transfer the
funds back to G.K Rathi group. Therefore, the amounts which were received by
the Appellant from the G.K.Rathi Group during the period 28 March 2000 to 30 March
2000 were immediately transferred back to G.K. Rathi group as investments into
Kosha Investments Pvt. Ltd. In fact the Assessing officer records the following
finding :
"The money never existed. Only debit and credit entries
were created in Bank by issuing cheques to one party and receiving the same
amount through that party by circular transaction. Thus the Bank accounts got
squared up showing no negative balance or positive balance at the end of a
particular date on account of the activity."
It is relevant to note that the Director of the four
subsidiary companies in his statement stated that the four subsidiary companies
decided to issue shares at the direction of the Appellant. The purchase of the
shares of the four subsidiary companies as mentioned above was completed during
the Assessment year 2000-01 i.e. financial year ending 31 March 2000.
Thereafter, in the present assessment year 200 1-02 as the Appellant was
conscious of the capital gain being made on the sale of land to Vysya Bank Ltd.
the shares of all the four subsidiary companies were sold at a loss to one
Radha Financial Services Private Ltd. and one Diplomat Trading Private Ltd. The
shares of the all the aforesaid companies were sold at a value of Rs.5/- per
share to Radha Financial Services Private Ltd .
and Diplomat Private Ltd. Consequently, the 1,50,000 shares held since
1992 and earlier when sold at Rs.5/- per share were available to the Appellant
as part of its long term capital loss of the present assessment year 2001-02.
The sale of 8,00,000 shares in each of the four subsidiary companies of the
Appellant at Rs.5/- per share which were acquired during the period 28 March
2000 to 30 March 2000 resulted in a short term capital loss and became part of
its short term capital loss for the assessment year 2001-02. The Director of
Radha Financial Services Private Ltd. one Shri. Deviprasad Budhiya in his
statement before the Income Tax authorities stated that he purchased the shares
of the aforesaid four subsidiary companies from the amounts received from T. B.
Ruia and Kosha Investments. In his statement he further stated that he gave
some of the amounts received by him to Diplomat Trading Private Limited through
another concern of his viz. Shree Fiscal Services Private Ltd. In his statement
he has stated that he was acting on the instructions of T. B. Ruia, who is the
Chairman of the Appellant company and received a consideration of Rs.62,500/-
for providing entries. Consequently, the Assessing Officer concluded that not
only the purchase of shares of the aforesaid four subsidiary companies was a
sham but also the sale of the same to Radha Financial Services Pvt. Ltd. and
M/s. Diplomat Trading Private Ltd. which were financed by the Appellant company
was also sham and there was no real transaction, so as to create any short term
and/or long term Capital loss in respect of the shares of the four subsidiary
companies in the hands of the Appellant.
c) The Appellant has also claimed loss on account of sale of
shares of Killick Halco Ltd. for the financial year ending 31 March 2001 i. e.
the present assessment year 2001-02. The Appellant had on 31 March 2000
converted its loan of Rs.4/- crores to Killick Halco Ltd. into equity shares at
the price of Rs.800 per share (including premium of Rs.700/-). This again was
exorbitant taking into account the fact that from the assessment year 1996-97
onwards Killick Halco Ltd. was consistently suffering losses. Further, Killick
Halco Ltd. had in fact scaled down its operation inasmuch, as it has given VRS
to its 86 employees and there was no reason to invest at share premium of
Rs.700/- per share in Killick Halco Ltd. This was particularly so as the
Assessing Officer had found that the appellant has earlier purchased shares of
Killick Halco Ltd. of Rs.19.87 per share in November 1999 i. e. in the
Assessment year 2000-0 1 and therefore, the price of Rs.800/- (including a
premium of Rs.700/-) per share in March 2000 i. e. also in the Assessment year
2000-0 1 was not justifiable at all. This purchase of shares by converting loan
into equities was only done, as the Appellant company was aware of the
forthcoming capital gain on sale of land in the next Assessment year i. e.
2001-02. Therefore it was found that the Appellant wanted to create an
artificial loss in the next Assessment year so as to reduce the amount of tax
payable on account of capital gain. The Assessing Officer enquired from the
Appellant company the reasons for investment in Killick Halco Ltd. at the
premium of Rs.700/- per share. The reason offered by the Appellant was that
they expected revival in the fortune of Killick Halco Pvt. Ltd. in the near
future. The Appellant thereafter in the present Assessment year i. e. 200 1-02
sold the shares of Killick Halco Ltd. at a price of Rs.83/- per share by
selling it to its group company viz. Snowcem India Ltd. The purchase of 50,000
shares was at exorbitant price of Rs.800/- per share and the sale of the share
to a group company at a price of Rs.83/- per share enabled the Appellant to
show a short term capital loss in respect of Killick Halco Ltd. of Rs.3.09
crores i. e. costs of acquisition of 50,000 shares at Rs.800/-(on conversion of
debt into equity) and 78,000 shares at Rs.19.87 per share purchased in November
1999 became a part of short term capital loss of Rs.49.49 crores. While
2,20,000 equity shares held from a period prior to 1981 were also sold at a
loss as a part of its long term capital loss of Rs.1.45 crores. The Assessing
officer held that as the shares of Killick Halco Ltd. were sold to a group
company, the Appellant continued to have control over it . Therefore the
investment in Killick Halco ltd. and its subsequent sale were only seen as a
vehicle for booking losses adopted by the Appellant. Therefore in the aforesaid
facts the Assessing officer held that purchase (conversion of debt into equity
) of 50,000 shares at Rs.800/- per share were sham and not bonafide and
therefore disallowed the short term loss on the above account. However the
Assessing Officer treated the investment of 78,000 shares at Rs.19. 97 per
share as genuine and allowed the short term capital loss with regard thereto.
d) The Appellant has also claimed long term capital loss of
Rs. 1.68 crores on sale of its shares in Pelican Paints Ltd. to Snowcem India
Ltd. (company belonging to the same group). The Appellant had purchased the
shares in financial years 1998-99 and 1999-2000 at Rs.518/- and Rs. 365/-
respectively in Pelican Paints Ltd. These shares were sold to Snowcem India
Ltd. at a nominal price of Rs.10/- per share during the present year. However,
while arriving at the true and fair value of Pelican Paints ltd. the Appellant
company failed to take in to account the land and buildings of Pelican Paints
ltd. Further it was found that the whole amount was settled by current account
adjustment between Snowcem India Ltd. and the Appellant. Consequently, the
Assessing Officer concluded that the sale was a sham and was self serving so as
to create long term capital losses.
(e) The aforesaid findings of fact have been arrived at by
the Assessing officer by his Order dated 29 March 2004 after considering the
evidence. The Order dated 29 March 2004 was affirmed by the Order dated 25
November 2004 of the C.I.T. (Appeals) and further confirmed by the Order dated
6 April 2010 of the Tribunal.
(f) Before the CIT (Appeal) the Appellant urged a new ground
of appeal which was as under:
"The learned Deputy Commissioner of Income tax ought to
have allowed the entire amount of consideration determined on acquisition of
land by Vysya Bank ltd. as business loss incurred by the Appellant in the
course of carrying on of business of providing guarantees."
5 It was the case of the Appellant that they have executed a
letter of guarantee to the extent of Rs. 100/- crores in favour of Vysya Bank Ltd.
Mumbai for consideration of the bank extending financial facilities to Geekay
Exim (India) Ltd., a company belonging to G. K. Rathi Group. At that time in
1996 an agreement was entered into between Geekay Exim India Ltd. and the
Appellant company inter alia providing that Geekay Exim India Ltd. would
indemnify the Appellant company against all actions and proceedings that may be
made by Vysya Bank Ltd. in connection with letter of guarantee executed by the
Appellant company in favour of Vysya Bank Ltd. In consideration of the above
guarantee, it was agreed that Geekay Exim India Ltd. shall deposit and keep
deposited with the Appellant at all times a sum of 10% of the facilities
sanctioned by Vysya Bank Ltd. to Geekay Exim India Ltd. on the basis of the guarantee.
It was also agreed that Geekay Exim India Ltd. will pay to the Appellant 2% of
its gross realization of export proceeds as commission to the Appellant in
consideration of the Appellant guaranteeing facilities extended by Vysya Bank
Ltd. Subsequently, Geekay Exim India Ltd. failed to repay its loan to Vysya
Bank Ltd. and the bank decided to execute the bank guarantee provided by the
Appellant. Consequently, an agreement was entered into in September 1999 by
which the Appellant company agreed to transfer its land to Vysya Bank Ltd. for
a consideration of Rs.105/- Crores which was to be adjusted against the
financial facilities provided to Geekay Exim India Ltd. The Appellant company
was claiming a loss of Rs. 105/- crores having arisen in the guarantee
business. This ground was taken by the Appellant for the first time before the
CIT (Appeal). The Appellant contended before the CIT (Appeal) that the
guarantee was extended by them during the regular course of business and
consequently, there was loss of Rs. 105/- crores.
6 The CIT (Appeal) concluded that the Appellant did not
carry out the activity of providing guarantee to Vysya Bank Ltd. in the normal
course of its business. Further, it was held that the Appellant company which
is following mercantile system of accounting had never accounted for the
commission income in its return of income filed after entering into contract
with Geekay Exim India Ltd. till the present assessment year when it has shown
an income of Rs.6/- crores in respect of the guarantee business as pertaining
to prior years in its account. The CIT (Appeal) concluded that the business was
not genuine, as if it had been genuine then Appellant company would have
provided guarantee commission income in the course of its regular course of
business. The CIT (Appeal) also held that the Appellant was entitled to receive
2% of the gross export realization of Geekay Exim India Ltd. but till date the
Appellant never received a rupee on that account and neither did it pursue the
recovery of the same. It was concluded that no prudent business man would risk
his land worth Rs. 105/- crores without ascertaining the returns to be
received. The CIT (Appeal) concluded that G.K.Rathi Group was shown as debtors
in the Appellant's books of account but the amount was neither treated as
doubtful nor written off. In view of the above, CIT(Appeal) concluded that
providing of guarantee to Vysya Bank Ltd. was not in the normal course of
Appellant's business and the resulting loss could not be allowed as a trading/business
loss.
7 The aforesaid finding of the CIT (Appeal) was upheld by
the Tribunal in its Order dated 6 April 2010.The Tribunal concluded that the
loss itself was not genuine and therefore, the same cannot be allowed as
deduction. The Tribunal inter alia held that though the Memorandum of
Association of the Appellant company did in its object clause provide for doing
the business of giving guarantees, the Appellant had not once in the last 50
years of its existence issued any guarantee and taking into account the over all
relations between G.K. Rathi Group and the Appellant company, the loss on
account of guarantee was not considered to be a genuine business activity.
8 The Tribunal in the impugned Order held that though the
amounts on account of Guarantee commission were accounted in the assessment
year 2000-0 1 they were never received by the Appellant and there is nothing on
record to show that any attempt was made to recover the same. The Tribunal
confirmed the finding of the CIT(A) that the Appellant company never bothered
to find out why Geekay Exim (India) Ltd. failed to pay the amounts to Vysya
Bank Ltd. The Tribunal observed as a fact that when the Appellant wanted to
invest in its subsidiary companies funds were organized to the extent of Rs.40
crores from G.K. Rathi group which also consist of Geekay Exim (India) Ltd.
Therefore the Tribunal wondered that why the above amounts could not be
recovered by the Appellant from G.K. Rathi Group or its group company Geekay
Exim (India) Ltd. Thus, according to the Tribunal the loss was a make believe
story which is different from reality.
9 The submissions of the Counsel are being considered by us
while dealing with the questions of law raised in the appeal.
10 So far as, question No.(i) referred to above is
concerned, it is contended by the Counsel for the Appellant that the Tribunal
had while examining the evidence before it in respect of all issues, chosen to
rely uponhe position in law laid down by the Supreme Court in the matter of
Sumati Dayal (supra) to the effect that the evidence produced must be analyzed
by applying the theory of surrounding circumstances and human probabilities.
However it is the grievance of the Advocate for the Appellant that before
placing reliance upon it, the Tribunal ought to have given notice of the same
to the parties as that would enable the parties to make submissions on the same
and demonstrate as to how it is inapplicable or distinguishable from the
present facts. Counsel for the Respondent stated that the test of applying
surrounding circumstances and human probabilities is a well known and accepted
manner of weighing evidence in all civil matters to decide whether the claim is
genuine or not and submitted that assuming without admitting that the same was
not cited and/or referred to during the course of the hearing no prejudice has
been caused to the Appellant.
11 To our mind, the test laid down by the Supreme Court in
the decision in Sumati Dayal is well a settled test which is applied in all
civil proceedings particularly, with regard to testing the genuineness of a
transaction. In fact the CIT (Appeals) has also applied the same test to reach
the conclusion that the transactions claiming a Capital loss on account of sale
of shares were not genuine. Counsel for the Appellant submitted that the
Tribunal by referring to the decision of the Supreme Court in Sumati Dayal
(supra), was in breach of the proviso to Rule 11 of the Income Tax Appellate
Tribunal Rules, 1963. Rule 11 of the Income Tax Tribunal Rules reads as under :
" The Appellant shall not, except by leave of the
Tribunal, urge or be heard in support of any ground not set forth in the
memorandum of appeal, but the Tribunal, in deciding the appeal, shall not be
confined to the grounds set forth in the memorandum of appeal or taken by leave
of the Tribunal under this rule :
Provided that the Tribunal shall not rest its decision on
any other ground unless the party who may be affected thereby has had a
sufficient opportunity of being heard on that ground."
The proviso to the Rule 11 would have no application to the
present facts, as the Tribunal has not based its decision on a ground which had
not been urged by the parties before it. The decision of the Supreme Court
supports a statement of a well settled position in law. Counsel for the
Appellant thereafter relied upon a decision of this Court in Inventure Growth
Vs. ITAT reported in 324 ITR 319 to submit that in similar facts, this Court
set aside the order of the Tribunal. In Inventure Growth and Securities Ltd.
(supra) a petition under Article 226 of the Constitution of India had been
filed challenging an order of the Tribunal passed on a rectification
application filed by the party. The Tribunal had disposed of the appeal on
merits by relying upon another decision of the Tribunal, without furnishing an
opportunity of hearing to the party to deal with the decision. Consequent
thereto, the party in the above case filed a rectification application before
the Tribunal under Section 254(2) and sought to bring on record the fact that
the decision of the co-ordinate bench on merits of the matter was not available
to the party as it had not been published in a law journal at the date of the
hearing and consequently they were not in a position to deal with the same. The
Tribunal by its order dated 20 November 2009 dismissed the rectification
application after recording the fact that the decision of the co¬ordinate Bench
of the Tribunal was not placed before the Tribunal either by the assessee or by
the Revenue and the Tribunal decided to follow it on its own. It was in the
aforesaid facts that this Court allowed the Misc. Application and restored the
appeal before the Tribunal for reconsideration. However, while doing so, the
Court clarified that "It cannot be laid down as un-flexible proposition of
law that an Order of remand on a miscellaneous application under Section 2
54(2) would be warranted merely because the Tribunal relied upon a judgment
which was not cited by either party before it.". In the present facts, the
decision of the Supreme Court in Sumati Dayal (supra) was cited only for the
purpose of reiterating the well settled/established position of law.
Surrounding circumstances and human probabilities are to be taken into account
while considering the evidence produced before the Tribunal to examine the
genuineness of the case. Counsel for the Appellant also relied upon a decision
of this court in CIT Vs. Jamnadevi Agarwal reported in 328 ITR 656 to contend
that this Court has not applied the decision of the Supreme Court in the matter
of Sumati Dayal (supra) in the above case as the documentary evidence produced
before the authorities, conclusively proved that there was no question of
introducing unaccounted money, as the transaction of sales took place at the
rates prevailing on that date in the stock market. The aforesaid decision in
the matter of Jamnadevi (supra) proceeded on its own facts and the decision of
the Supreme Court was held to be inapplicable in the factual context existing
in that case. However, the decision of the Supreme Court in the matter of
Sumati Dayal (supra) would be applicable, when ever there are reasons to
believe that the apparent is not real; then the taxing authorities are entitled
to look into surrounding circumstances to find out the reality by looking at
the surrounding circumstance and applying the test of human probabilities. A
reference to the decision in Sumati Dayal's case on a principle of law cannot
be said to have caused prejudice to the Appellant. This conclusion is based
while proceeding on an assumption that the aforesaid decision of the Supreme
Court was not cited and/or referred to during the course of the hearing leading
to the order dated 6 April 2010. In view of the above, no substantial question
as framed at (i) above arises in the present case.
12. So far as questions No. (ii) to (vii) are concerned,
Counsel for the Appellant did not separately address on each question of law
but submitted that as the Tribunal was guided by the decision of the Supreme
Court in Sumati Dayal (supra) that led to a miscarriage of justice leading to a
substantial question of law. As pointed out hereinabove, while disposing of
question No.(i) raised by the Appellant, the Tribunal merely records a well
settled position of law and in the course of recording the same, referred to
the decision of the Supreme Court in the matter of Sumati Dayal (supra) and
same test had been applied by CIT(Appeal) without referring to the decision.
Counsel for the Appellant relied upon the decision of the Supreme Court in Omar
Salay Mohamed Sait reported in 1959(37) ITR 372 to contend that where the
findings of the Tribunal are based on suspicion, conjectures or surmise or on
no evidence then even if they are questions of fact they are liable to be set
aside. Counsel for the Appellant further submitted that in the present case the
shares had in fact been purchased and transferred and all documents were on
record to establish to purchase and sale of shares. Consequently, there is no
reason to deny the benefit of loss on account of capital gain on account of
sale of shares. So far as Question No. (vi) is concerned, Counsel for the
Appellant urged that the tribunal was incorrect in holding that there could be
no loss on guarantee business as the Appellant had not done a single transaction
prior to the present transaction. It was submitted that even a single
transaction could constitute business for the purposes of the Income Tax Act.
Counsel for the Appellant further submitted that on facts the Tribunal had for
the earlier year i.e. Assessment year 2000-0 1 assessed Rs. 6/- crore as
business income and therefore the loss in the current year should have been
allowed. Counsel further contends that the Tribunal erred in holding that there
is nothing on record to show that the Appellant had tried to recover the money
ignoring the fact that the Order itself notes that a copy of the suit was
produced during the course of the hearing. Counsel for the Respondent contended
that there are concurrent findings of fact of three authorities and the Appeal
should not be entertained.
13 We have considered the submissions of the Counsel for the
Appellant and the Respondent in respect of Question No. (ii) to (vii).
14 So far as the principle laid down in the matter of Omar
Salay Mohamed Sait (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 same. We find that the Tribunal has considered the
evidence of purchase and sale of shares to book long term and short term losses
and taking all the evidence together including the surrounding circumstances
reached a finding that the purchase and sale of shares is not genuine. So far
as the decision of the Supreme Court in Vodafone International (dated 20
January 2012) is concerned, the Court considered its decisions in the matters
of McDowell reported in (1985) 3 SCC 230, Azadi Bachao reported in (2004) 10
SCC 1 and the Mathuram Agarwal reported in (1999) 8 SCC 667 and concluded that
where the transaction is not genuine but a colourable device there could be no
question of tax planning. The Supreme Court in the aforesaid case after
considering the aforesaid two decisions concluded as follows:
"The majority judgment in McDowell held that "tax
planning may be legitimate provided it is within the framework of law"
(para-45). In the latter part of para 45, it held that "colourable device
cannot be a part of tax planning and it is wrong to encourage the belief that
it is honourable to avoid 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 para 46 where the
majority holds "on this aspect one of us, Chinappa Reddy, J. has proposed
a separate opinion with which we agree".The 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 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 contradistinction to
"legitimate avoidance of tax liability (Paras 7-10, 17 and 18). 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 Agarwal."
15 The aforesaid observations of the Supreme Court makes it
very clear that a colourable device cannot be a part 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 part 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 McDowell (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 term capital loss was found as a
matter of fact by all the three authorities to be a sham. Therefore authorities
came to a finding that the same was not genuine. So far as the question
Nos.(ii), (iii) (iv) and (v) are concerned, we hold that these are pure
questions of facts and as there are concurrent finding of the authorities
below, no question of law arises for this Court to interfere.
16 So far as Question No.(vi) is concerned, the issue of
guarantee loss was raised for the first time in appeal before CIT (Appeal) and
both the CIT (Appeal) and the Tribunal also found that the claim for loss is
not genuine. However, the Appellant is correct in contending that even a single
transaction could be in the nature of trade. However, on examination of
surrounding circumstances and the parties involved viz. the G.K. Rathi group
and its close relationship with the Appellant, it was concluded that the
transaction was not genuine. The Tribunal is entitled to look at the
surrounding circumstances and to human probabilities to test the evidence led
before it. However, while testing the evidence the Tribunal must correctly look
at all the evidence and the surrounding circumstances to decide the issue. We
find that the Tribunal has considered the fact that for the earlier year Rs.6/-
crores was assessed to tax but held that there is no evidence to show that any
attempt was made to recover the amounts from Geekay Exim (India) ltd. when in
fact evidence was placed before the Tribunal by the Appellant of suits being
filed by the Appellant against Geekay Exim (India) Ltd. However what is the
nature of suits and for what amounts etc is something which has not been
examined. The Tribunal in its order amongst other factors has also taken into
account the fact that ever since 1947 when the Appellant company was
incorporated it had never issued any Guarantee and therefore, the deduction of
business loss of Rs. 105/- crores for providing guarantees by the CIT (Appeal)
was upheld by the Tribunal. To our mind, the fact that the Appellant did not do
the business of providing guarantees earlier will not prohibit the assessee
from providing guarantees during the relevant assessment year. The Memorandum
of Association of the Appellant company does provide as one of its objects for
providing guarantees in respect of loans advanced to other parties. There were
other reasons for which the Tribunal and the CIT did not accept the business
loss of Rs.105/- crores emerging from the Appellant's business from providing
guarantees. The surrounding circumstances can be looked at, but not without
considering the evidence led by the party in support of its stand. In this
case, the Tribunal has not considered the evidence of suit etc. being filed by
the Appellant before rejecting its claim for loss only on the basis of
surrounding circumstances. In view of the above, so far as the question No.(vi)
is concerned, it would be proper to remand the matter to the Tribunal to
reconsider the issue and pass an appropriate orders thereon.
17. So far as the Question No.(vii) is concerned, we are of
the view the same does not arise as all the authorities including the Tribunal
have considered all the evidence produced before them and on appreciation of
facts have come to a conclusion which is a possible conclusion. Therefore,
question No.(vii) also does not arise.
18 In view of the aforesaid reasons, the order of the
Tribunal dated 6 April, 2010 is set aside only to the extent that the business
loss of Rs. 105/- crores on account of the business of giving guarantees
claimed by the Appellant has been rejected. The Tribunal shall hear the
Appellant and the Respondent to decide afresh on the issue.
19 The Appeal is, accordingly, disposed of. No order as to
costs.
Sr Name of the Amount
No. of 31.3.92 31.3.90
Total Capital No. party (including
shares (100%
(100% holding % premium
of Rs.140) subscripti on (during the
F.Y. Holding) Holding)
of Killick Nixon holding
1999-2000 Ltd. )
1 Matterhorn
Investments Pvt. Ltd. 12.03 Cr. 800000 149998
2 950000 100%
2 Montblanc
Investments Pvt. Ltd. 12.03 Cr. 800000 149998
2 950000 100%
3 Fircrest Investment
Pvt. Ltd. 12.03 Cr.
800000 149998 2 950000 100%
4 Galactica
Investment Ltd. 12.03 Cr. 800000 149998
2 950000 100%
48.12 Cr.
