Income Tax Appellate Tribunal - Delhi
Shell India Private Limited vs Addl. Commissioner Of Income Tax, ... on 22 December, 2004
Equivalent citations: [2005]93ITD54(DELHI), (2005)94TTJ(DELHI)206
ORDER
P.M. Jagtap, A.M.
1. This appeal by the assessee is directed against the order. of learned CIT(A)-XI, New Delhi dated 22/3/2002.
2. In ground No. 1, the assessee has challenged the action of the learned CIT(A) in upholding the order of the Assessing Officer denying the assessee adjustment of carry forward loss of Rs. 33,72.320/-.
3. The assessee in the present case is a private limited company owned folly by M/s Shell International Petroleum Co. Ltd., UK. ('SIPC' in short). It filed its return of income for the year under consideration originally on 30/11/98 declaring a total income of Rs. 1.47.54,550/-. The said return was subsequently revised on 1/12/99 declaring a total income of Rs. 1,63,80,140/- In the return of income, the assessee company claimed brought forward and set off of losses of earlier year i.e. A.Y. 97-98 amounting to Rs. 33,72,320/- against the income for the year under consideration. Since share holding pattern was changed during the year under consideration inasmuch as more than 51% shares had changed hands', the assessee was called upon by the Assessing Officer to explain as to why its claim for set off of brought forward losses should not be disallowed in view of the provisions of Section 79. In reply, it was submitted on behalf of the assessee company that the earlier shareholders Shri C.R. Dua and Shri V.S. Mehta did not hold any beneficial interest in the said shares and therefore it was entitled to claim the set off of the brought forward losses for the earlier years, It was further explained that M/s SIPC was given approval to set up a 100% owned holding company on 22/7/96 by the Government of India and before getting the other required approvals including the approval of Reserve Bank of India under Foreign Exchange Regulation Act 1973, the process of incorporating the company in India was started by applying for approval of name using the word "Shell" through Shri V.S. Mehta and Shri C.R. Dua for, which no objection certificate was issued by SIPC. As a result of this, the company came to be incorporated in India with these two persons as initial subscribers to the shares. The Assessing Officer, however, found no merits in the submissions made on behalf of the assessee company. According to him, the company was promoted and incorporated by Shri C.R. Dua and Shri V.S. Mehta by subscribing initially to ten shares each of the said company. The said shares thus were owned by the said two persons and merely because no objection certificate for the word "Shell" to be used in the name was given by M/s SIPC, it did not mean that the said shareholders were not the beneficial owners and that it was SIPC who owned the said shares beneficially. The Assessing Officer also found that nothing was brought on record on behalf of the assessee company to show that the said shares prior to the transfer in September, 1997 were, in fact owned by M/s SIPC. He, therefore, came to the conclusion that more than 51 % of the shares held in the A.Y. 97-98 have changed hands in the year under consideration and the assessee company, therefore, was not entitled to carry forward and set off the loss of the said year against the income of the year under consideration in view of the provisions of Section 79. He also held that even otherwise, the loss for A.Y. 97-98 claimed by the assessee was a pre-commencement loss and the same not being a revenue loss, the claim of the assessee for setting off the said loss against the income of the year under consideration was not allowable. Aggrieved by the order of the Assessing Officer, the matter was carried by the assessee company before the learned CIT(A) by preferring an appeal and the submissions made before the Assessing Officer were reiterated on its behalf before the learned CIT(A). The same, however, did not find favour with the learned CIT(A) who upheld the action of the Assessing Officer on this issue for the following reasons in paragraph 2.3 of his order:-
"2.3 As per provisions of Section 79 of I.T.Act, in the case of companies in which public are not substantially interested, loss will not be carried forward and set off unless the shares of the company carrying not less than 51% of the voting power were beneficially held by the same person(s) both on the last day of the previous year in which loss occurred and on the last day of the previous year in which brought loss is sought to be set off. The only exception is where a change in voting power takes place in a previous year consequent upon the death of a shareholder or transfer of shares byway of gift to any relative or shareholder making the gift. The provisions of Section 79 are quite unambiguous and there is no loophole which could be exploited by the taxpayers hence I am in agreement with the observations of AO and I hereby uphold the disallowance."
Aggrieved by the aforesaid order of the learned CIT(A), the assessee is in appeal before the Tribunal.
4. The learned counsel for the assessee submitted that 20 shares were initially allotted to Shri V.S. Mehta and Shri C.R. Dua only for the purpose of formation of the company and the nominal contribution made by them could not be deemed to be a beneficial interest in the company because government sanction on the basis of which the company was formed was for setting up of 100% owned holding company with equity participation from SIPC. He submitted that since the formation of a company -requires a minimum of two shareholders, the said 20 shares had been initially allotted to Shri Mehta and Shri Dua who were the independent lawyers engaged for the purpose of incorporating the company. He contended that in these circumstances, such holding by the said persons of 20 shares in the assessee company could not be considered as beneficial holding since it was for the limited purpose of forming the company. He submitted that permission from FIPB was awaited at the relevant time and after getting such permission, the said shares were transferred in the year under consideration to SIPC. He submitted that except the value of Rs. 200/- of the said shares contributed by Shri V.S. Mehta and Shri C.R. Dua, the remaining amount of Rs. 91,16,250/- was funded by SIPC; during the previous year relevant to assessment year 1997-98 which again goes to show that the shares were allotted to Shri Dua and Shri Mehta for the limited purpose of forming the company and the beneficial owner of such shares was only SIPC. He submitted that the entire loss suffered by the assessee company in the previous year relevant to assessment year 1997-98 thus was met by SIPC and there was no contribution either by Shri Mehta and Shri Dua except the initial contribution of Rs. 200/- made by them.
5. The learned counsel for the assessee invited our attention to a copy of no objection letter issued by SIPC for use of the word "Shell" in the name of the proposed company to be incorporated in India by Shri V.S. Mehta and Shri C.R. Dua and also to a copy of certificate issued by HDFC Bank confirming the remittance of Rs. 91,16,250/- sent by SIPC to the assessee company in the previous year relevant to assessment year 1997-98 placed at page No. 23 and 33 of his paper book respectively. His submission in this regard was that this documentary evidence is sufficient to show that Shri Mehta and Shri. Dua subscribed to the initial 20 shares for the sake of completing the formalities required for incorporating the company in India and it was SIPC alone who was the actual beneficial owner of the said shares.
6. Relying on the decision of Hon'ble Supreme Court in the case of CIT, Bombay City-I v. Jubilee Mills Ltd. - 48 ITR 9 and in the case of C.W.S.(India) Ltd. and Ors. v. CIT - 208 ITR 649 (SC), the learned counsel for the assessee contended; that literal construction of the legal provisions has to be avoided if the very purpose of introducing such provisions is getting defeated. He submitted that the provisions of Section 79 have been inserted in the Statute for the purpose of avoiding/preventing the possibility of a few persons acquiring the shares of a company which has sustained losses in the earlier years and then commence to carry on profitable business through such company in order to reduce their tax liability through securing set off of losses of earlier years when the shares in the company were held by different shareholders. He submitted that in order to safeguard the interest of Revenue against such practice, the provisions of Section 79 were introduced in the Statute and since no such practice or facts are involved in the present case, applying the said provisions strictly and literally would be harsh to the assessee and the same will not be in consonance with the legislative indention behind introducing the said provisions. His contention, therefore, was that the authorities below were not justified in disallowing the claim of the assessee for setting off the loss of A.Y. 97-98 against the income of the year under consideration by applying the provisions of Section 79 and the claim of the assessee may be allowed setting aside their orders on this issue.
7. The learned DR, on the other hand, submitted that the provisions of Section 79 are very clear and unambiguous and the language used therein being plain and simple, the said provisions need not be interpreted differently by taking recourse to the legislative intention as sought by the learned counsel for the assessee. He submitted that there is nothing on record to show that the shareholders Shri Mehta and Shri Dua holding 20 shares in their name were not beneficial owners of the said shares as claimed on behalf of the assessee company. He contended that the voting rights in respect of the said shares, therefore, was held by the said shareholders and it is not the case of the assessee company that such voting powers were available to be exercised by it. He invited our attention to page 4 of the order of the Assessing Officer and pointed out that the assessee company having not commenced its business in the previous year relevant to assessment year 1997-98, the loss claimed to have been suffered in the said year, in any case, was not revenue Joss allowed to be set off against the income of the assessee company for the year under consideration as held by the Assessing Officer.
8. We have considered the rival submissions and also perused relevant material on record. It is observed that although there are sufficient circumstances to show that the assessee company was incorporated and established in India in the previous year relevant to assessment year 1997-98 by Shri Mehta and Shri Dua at the instance of M/s SIPC, the fact remains to be seen is that all the 20 shares in the said company were initially subscribed by the said shareholders in their own name and they remained to be so till the end of the said year i.e. upto 31/3/97. Moreover, inspite of the fact that huge funds were remitted by SIPC to the assessee company for funding its operation in the previous year relevant to assessment year 1997-98 which resulted in the loss in question, the amount paid for the aforesaid 20 shares was invested by Shri Mehta and Shri Dua from their own resources and the same remained to be invested as such till 31/3/97. In these circumstances, it is difficult to accept the stand of the learned counsel for the assessee that the said shareholders were not the beneficial owners of the aforesaid 20 shares in the previous year relevant to assessment year 1997-98. In the case of Raghuvanshi Mills reported in 41 ITR 613, it was held by the Hon'ble Supreme Court that the word "beneficially" indicates that the voting power arising from the holding of the shares should be free and not within the control of some other shareholder and the registered holder should not be a nominee of another. In the present case, as pointed out by the learned DR, the voting power in respect of 20 shares was available to be exercised by the said shareholders in their individual capacity and there is nothing on record to suggest that the assessee company was exercising such voting power or that Shri Dua and Shri Mehta were merely nominees of SIPC. Thus, the aforesaid 20 shares representing the entire capital issued by the assessee company on the last day of the previous year relevant to assessment year 1997-98 were held beneficially by Shri Mehta and Shri Dua and the same having been transferred during the year under consideration, the case of the assessee was covered by the provisions of Section 79 and the loss incurred in the previous year relevant to 1997-98 was not available to be carried forward and set off against its income for the year under consideration.
9. It is well settled that the words of the Statute are to be understood in their natural, ordinary or popular sense and phrases and sentences are construed according to the grammatical meaning, unless that leads to some absurdity or unless there is something in the context or in the object of the Statute to suggest the contrary. There is a presumption that words are used in an Act of Parliament correctly and| exactly and not loosely and inexactly. The intention of the legislature is primarily to be gathered from the language used which means that attention should be paid to what has been said as also what has not been said. When the language of the Statute is transparently plain, it is wrong to give it colour according to the temper of time. The taxing statute is generally to be strictly construed where one has' to simply adhere to the words of the statute. The following famous passage from Rowlatt J., which has been repeatedly quoted with approval by the Hon'ble Supreme Court of India, may be usefully quoted :
"In a taxing Act one has to look merely at what is clearly said. There is no presumption as to tax. Nothing is to be read in. nothing is to be implied. One can look fairly at the language used."
Further, the proper course in construing revenue Acts is to give fair and reasonable construction to their language without leaning to one side or the other. Considerations of hardship, injustice or anomalies do not play any useful role in construing taxing statutes unless there be some real ambiguity.
10. In the present ease, the provisions under consideration are those contained in Section 79 of the Income Tax Act, 1961 which, as applicable to the year under consideration, read as under:
"79. Notwithstanding anything contained in this Chapter, where a change in shareholding has taken place in a previous year in the case of a company not being; a company in which the public are substantially interested, no loss incurred in any year prior to the previous year shall be carried forward and set off against the income of the previous year unless-
(a) on the last day of the previous year the shares of the company carrying not less than fifty-one per cent of the voting power were beneficially held by persons who beneficially held shares of the company carrying not less than fifty-one per cent of the voting power on the last day of the year or years in which; the loss was incurred."
As is evident, the aforesaid provisions are simple, plain, clear and unambiguous liable for no different interpretation than the one gathered from the language used in the Statute. The learned counsel for the assessee, however, has invited our attention to the legislative intention behind introducing the said provisions in the Statute and pointed out that such legislative intention was to curb the practice of a few persons acquiring the shares of a company which has sustained losses in the earlier years and then commence to carry on profitable business through such company in order to reduce their tax liability through securing set off of losses of earlier years when the shares in the company were held by different shareholders. He has contended that since the case of the assessee does not fall within such mischief, literal construction of the provisions of Section 79 would lead to genuine hardship to the assessee and since the very legislative intention behind introduction of the said provisions is getting defeated, such literal interpretation has to be avoided. In support of this contention, he: has relied on the two decisions of Hon'ble Supreme Court in the case of CIT, Bombay City I v. Jubilee Mills Ltd. (supra) and C.W.S.(India) Ltd. and Ors. v. CIT (supra). We have carefully perused both these decisions of Hon'ble Supreme Court.
11. In the case of CIT v. Jubilee Mills Ltd. (supra), the question of interpretation of particular provisions of Statute, either liberally or literally, was not directly before the Hon'ble; Supreme Court but the question was whether on the facts and in the circumstances of the case, the assessee company is a company in which the public are substantially interested for the purposes of Section 23 A of the Act? Their Lordships of the Apex Court answered the said question in negative and in favour of the Revenue having regard to the facts and circumstances of the case before them aid the said decision, therefore, cannot be considered as an authority or precedent on the issue of interpretation of statute. In other case of C.W.S.(India) Ltd. and Ors. v. CIT cited by the learned counsel for the assessee, the Hon'ble Apex Court, no doubt, while agreeing with the general rule of construing taxing enactments literally, observed that it does not mean that it should be 4adopted even if it leads to a discriminatory or incongruous result. However, in the said case before the Hon'ble Supreme Court, the issue involved was relating to the interpretation of the word "such" used in the relevant; provisions and since two interpretations of the said word were possible and the language of the statute in its ordinary meaning and grammatical 'construction was leading to a manifest contradiction of the purpose of the enactment, their Lordships preferred to depart from the rules of grammar on the ground that the legislature could not possibly have intended what the said word signify and that the modifications made are mere corrections of careless language and really give the true meaning. In our opinion, this, decision of the Hon'ble Apex Court cannot render any help to the assessee in the present case because the language used in the relevant provisions of Section 79 does not give any scope for more than two interpretations and any attempt to interpret the same in a way to allow relief to the assessee would reduce the statute to a futility. The principle expressed in the maxim 'UT RES MAGIS VALEAT QUAM PEREAT is that the language of the statute may rather have effect than be destroyed. When a statute has some meaning even though it is obscure, the Courts have to say what meaning the statute is to bear, rather than reject it as a nullity. The Courts should strongly lean against a construction which reduces the statute to a futility. When the meaning of the word is plain, it is not the duty of the Court to busy themselves with supposed intentions, There is no scope for importing into the statute the words which are not there. CASUS OMISSUS cannot be; supplied by the Court except in the case of absolute necessity and when the reason for it is found in the four corners of the statute itself. The function of the Court is only to expound and not to legislate Rules of interpretation become relevant only when there is a choice between two interpretations. If the language is plain, the choice does not arise and we have to accept the only meaning that the plain language permits.
12. In the present case, the language of the relevant provisions of Section 79 is plain, clear and unambiguous as discussed earlier which does not give any rise to any other interpretation than the one gathered from the language used and this being the position, we find it difficult to accept the contention of the learned counsel for the assessee that the case of the assessee being not covered by the mischief sought to be curbed by the insertion of the provisions of Section 79 as reflected in the legislative intention behind introducing the said provisions, the same should be interpreted liberally and not literally for taking it out of the scope and ambit of the said provisions. The same is, therefore, rejected upholding the impugned order of learned CIT(A) whereby he confirmed the action of the Assessing; Officer in disallowing the claim of the assessee for setting off the loss of the earlier year i.e. assessment year 1997-98 against the income of the year under consideration invoking the provisions, of Section 79.
13. It is worthwhile to note here that the claim of the assessee for the set off of the aforesaid loss had also been disallowed by the Assessing Officer for the reason that the same being a pie-commencement loss, was not a revenue loss which could be set off against the income of the year under consideration. As it appears from the impugned order of learned CIT(A), no arguments were advanced on behalf of the assessee before him on this issue nor the same have been put forth even in the appellate proceedings before us. As such, considering all the facts and circumstances of the case, we hold that there is no infirmity in the impugned order of learned CIT(A) in upholding the order of the Assessing Officer denying the assessee adjustment of the loss of earlier year i.e. assessment year 1997-98 against the income for the year under consideration. The same is, therefore, upheld dismissing ground No. 1 of the assessee's appeal.
14. In ground No. 2, the assessee has challenged the action of learned CIT(A) in confirming the disallowance of Rs. 38,800/- made by the Assessing Officer on account of expenses incurred on household equipment maintenance and inland travel of Mr. M. Mackie, an expatriate.
15. After considering the rival submissions and perusing relevant material on record, it is observed that the expenses of Rs. 20.000/- and Rs. 18,800/- claimed by the assessee under the head "miscellaneous expenses" pertained to family travel and household equipment maintenance of Mr. M. Mackie, an expatriate. Since the said expenses were not covered in the agreement dated 27/3/98 entered into between the assessee company and SIPC, the Assessing Officer disallowed the claim of the assessee on this count. Before the learned CIT(A), the fact that the said expenses were not covered under the aforesaid agreement could not be controverted on behalf of the assessee company and the learned CIT(A), therefore, proceeded to confirm the disallowance made by the Assessing Officer on this count. Even; before us, the learned counsel for the assessee has not been able point out that the said expenditure was incurred as a contractual obligation and this being so. we find no justifiable reason to interfere with the impugned order of learned CIT(A) disallowing the claim of the assessee on this count. The same is, therefore, upheld dismissing ground No. 2 of the assessee's appeal.
16. As regards ground No. 3 relating to the addition of Rs. 5,70,700/-made by the Assessing Officer being 10% of the expenditure on mobile and residential telephones provided to its employees by the assessee company for personal use, it is observed that such disallowance on ad-hop basis for personal use has been held to be unsustainable in the case of a Company by various Benches of the Tribunal relying on the decision of Hon'ble Gujarat High Court in the case of Sayaji Iron & Engg.Co. v. CIT. In the said Judgment, their Lordships of Gujarat High Court observed that the company is a distinct person and by its very nature, it cannot have any personal use. Their Lordships, therefore, held that personal use of the directors could not be considered as personal use in the case of the company. Keeping in view the aforesaid judicial pronouncements, we hold, that there was no justification in the disallowance made by the Assessing Officer and confirmed by the learned CIT(A) on ad-hoc basis for personal use of telephones by the employees of the assessee company and deleting the same, we allow ground No. 3 of the assessee's appeal.
17. As regards ground No. 4 relating to the disallowance of Rs. 8 ,74,760/- made by the Assessing Officer and con tinned by learned CIT(A) being 10% of the total expenditure incurred by the assessee company on foreign travel of its employees, it is observed that this disallowance was made by the Assessing Officer mainly for the reason that the required details giving purpose of visit, countries visited, duration of the foreign visit etc. were not furnished by the assessee company, before him. The learned CIT(A) also confirmed the said disallowance observing that in the absence of the said details furnished by the assessee company before the Assessing Officer, the possibility of non-business expenditure involved therein could not be ruled out. Before us the learned counsel for the assessee. however, has filed a Statement giving details of foreign travels such as name of the employee undertaking the foreign travel, country visited, duration of visit purpose of visit etc. Since these details were not filed by the assessee company either before the Assessing Officer or before the learned CIT(A), we deem it just and proper to give an opportunity to the Assessing Officer to, verify the same. This issue is, therefore, restored to the file of the Assessing Officer for verification of the details of foreign travel filed by the assessee and to quantify the disallowance after such verification. Ground No. 4 of the assessee's appeal is, accordingly, treated as allowed.
18. In the result, the appeal of the assessee is partly allowed.