Income Tax Appellate Tribunal - Kolkata
Edward Keventer Pvt. Ltd. vs Dcit on 18 January, 2003
Equivalent citations: [2004]89ITD347(KOL)
ORDER
C.L. Sethi, J.M.
1. These two appeals, filed by the assessee, are directed against two separate orders dated 29-12-2000 and 25-1-2001 passed by the CIT(A) in the matter of assessments made Under Section 143(3) pertaining to A.Ys. 1993-94 and 1995-96 respectively. The issues involved in these appeals are connected to each other as these two appeals were heard together, and as such a common order is being passed for the sake of convenience.
ITA No. 344 (Cal)/2001 (A.Y. 1993-94) :
2. Gr. No. 1 is stated by the assessee in its concise ground of appeal is as under :-
"That the Ld. CIT(A), Central-II, Calcutta, erred in confirming the disallowance of the loss of Rs. 1,68,12,637/- suffered by the appellant company during the previous year corresponding to the assessment year 1993-94 on sale of 12,32,000 shares in Keventer Agro Ltd. and claimed by it under Section 45 read with Section 48 of the income-tax Act, 1961."
3. This issue is related to the disallowance of capital loss of Rs. 1,68,12,637/-. The facts related to this issue has emerged out of the orders of the authorities below are as follows:
3-1. A company, named Keventer Agro Ltd., hereinafter referred to as Keventer was promoted by the assessee-company to take over and run its fruit drinks business. The Industrial Credit & Investment Corporation of India Ltd. (ICICI, short), upon appraisal of fruit drink products, advance secured loan to Keventer to part finance the product. As on 31-3-91 the paid up capital of Keventer stood at Rs. 2,50,90,000/- divided into 25,09,000 shares of Rs. 10/- each. On this date the holding of the assessee-company in the share capital of Keventer was 12,32,000 shares, out of which 3,02,000 shares were directly allotted to the assessee-company and the balance 9,30,000 shares were purchased from Infrastructure Leasing and Financial Securities Ltd. as a part of promoters' share capital. The rest of the share capital of Keventer were held by Shri M.K.Jalan, his associates and M.K.Jalan Group & Co. The cost of investment of 12,32,000 shares of Keventer, excluding share transfer cost or Rs. 76,421/- as shown in the balance-sheet as on 31-3-91 stood at Rs. 1,83,49,100/-. There was no change in the assessee-company's share holding in the share capital of Keventer up to 31-3-92. In July, 1992, the assessee-company sold its entire holding of 12,32,000 shares of Keventer to the assessee's five different sister companies over whom the assessee has influence and control and which was belonged to Jalan Group of Companies, at a price of Rs. 2.50 per share on the basis of alleged valuation of shares carried out by one S.R. Batliboi Consultant Pvt. Ltd. This sale of 12,32,000 shares at Rs. 2.50 per share gave rise to alleged capital loss of Rs. 1,68,12,637/-. It was further found by the A.O. that the assessee-company had bought back 12,80,000 shares of the Keventer @ Ts. 2.50 per share on two different dates i.e. 25-2-93 and 4-3-93. In this way the assessee-company had again acquired holdings of 12,80,000 shares in Keventer as on 31-3-93. During the assessment proceedings the assessee-company was specifically asked to clarify the position regarding capital loss in shares as claimed, from the point of allowability of the said claim, in response thereto a written submission on 29-3-96 was filed by the assessee-company. In the written submission, the assessee-company mainly stressed on the genuineness of the transaction of sale of shares to the aforesaid five sister companies of the same Group. The main point as to the purpose of such sale of shares and then purchase back of more or less number of shares was however not touched or commented upon by the assessee in its reply dated 29-3-96. During discussion the authorised representative of the assessee-company had only stated before the A.O. that the management decided the same. From the facts and materials available with the A.O., the following points were emerged out as noted by the A.O. in his order :
1. The sales of the shares were made by bills dated 6-7-92 in all the cases;
2. The purchases back of the shares of the same company (Ms. Keventer Agro Ltd.) from the same five companies were made by bills dt. 25-2-93/4-3-93;
3. The shares were unquoted and their market value not being available the value 2.50 per share as per report of M/s. S.R. Batliboi Consultants Pvt. (SRBC Pvt. Ltd.) was taken for both sale and purchase.
From the report it is seen that the value was purely estimate based and was taken at hypothetical figure of 25% of face value. The loss calculated w.r. to such valuation was also estimated loss.
4. The purpose for which whole of shares of M/s. Keventer Agro Ltd. were sold to its group companies and the purpose for which more of less the same No. of shares of M/s. keventer Agro Ltd. were purchased back from the same group companies could not be explained convincingly. The reply that sales were made to improve fund position and that the purchases were made again because the management decided it was just a reply for the sake of a reply.
The A.O., therefore, came to the conclusion as follows :-
"From the facts and circumstances of the case, the entire series of transactions relating to sale of shares of M/s. Keventer Agro Ltd. and relating to purchase of shares of M/s. K.A.Ltd. are found to have been arranged with a view to claim huge loss in the case of the assessee company for getting the benefit of set off of such loss in future. By these series of transaction the position of investment of all the other companies remain more or less unaffected as such but the loss results in the books of the assessee company and other group companies. The entire loss claimed in this case, is, therefore, ignored as arranged book loss."
It is, therefore, seen that the A.O. has disallowed the claim of the loss by saying that the entire series of transaction relating to the sale of shares and then re-purchasing the same have been with a view to claim huge loss so as to get the benefit of satting it off in future. The A.O. was of the view that the entire loss was nothing but an arranged book loss. Being aggrieved, the assessee carried the matter before the CIT(A) who upheld the action of the A.O. and dismissed the assessee's appeal. During the course of appeal proceedings before the CIT(A), the assessee-company contended that the alleged transaction of sale and purchase of shares of Keventer were genuine inasmuch as the motive or the purpose of selling the shares was to reduce the burden of borrowings of the assessee-company and the resultant interest burden. It was also submitted before the CIT(A) that the motive or purpose of transaction was wholly irrelevant for the tax purpose. It was also submitted that the allegation of the A.O. to the effect that the said transactions were arranged to book huge loss are based on mere suspicion, surmises and conjectures. With regard to the point as to why the assessee-company had bought back the shares of Keventer which it had sold off only a few months ago. It was submitted by the assessee that with a view to take the Keventer out of the mischief of Section 79 of the Act which restricts the benefit of brought-forward and set off of the loss of earlier years in the year under consideration by reason of the reduction of voting power held by the same person both on the last date of the previous year in which the loss was incurred and the last date of previous year in which the brought-forward loss is sought to set off, the assessee-company decided to bring back its holding to some extent as it held on the last day or the previous year in which the loss was occurred in the case of Keventer. In other words, it was stated that unless the shares in Keventer beneficiary held by the some person were bought back to at least 51% the Keventer would lose the benefit of carrying forward the loss and set it off against the profit that may be earned in future, and, therefore, the best course open to the assessee-company was to buy back 12,80,000 shares of Keventer from the same five sister companies to whom the shares were also sold by the assessee-company. In short, it was submitted that the transactions of sale and purchase were genuine and as the shares were duly transferred and re-transferred as per rules and regulations, such loss incurred by the assessee in the transaction of sale of shares is allowable and to be carried forward to subsequent years. Hearing considered the submissions of the assessee-company and going through the written submissions filed before the CIT(A), the CIT(A) decided the matter against the assessee by observing that the assessee company has fallen to establish its bona fides in respect of the alleged share transactions. The CIT(A) has discussed the issue in detail as seen from his order. Still aggrieved, the assessee is in appeal before this Tribunal.
4. Mr. N.K. Poddar, the Ld. Sr. Counsel appearing for the assessee has invited our attention to the three volumes of paper books filed before us and as well as to the judicial decisions, copies of which are placed in the paper book.
The Ld. counsel for the assessee has raised the following contentions in support of the assessee-company's case:
(i) That there was no doubt as to the genuineness of sale and re-purchase transactions of shares in question inasmuch as the transactions were carried out through account payee cheques and the shares in question were duly transferred in the name of respective bayer-companies in the share register and were re-transferred in the name of the assessee-company on re-purchase.
(ii) That the assessee-company had no alternative than to buy back the shares previously sold by it to five companies in order to enable Keventer to avail the benefit of carrying forward and setting off its business losses of Rs. 109.28 lacs which otherwise would not have been available to the Keventer in view of the provisions of Section 79 of the Act which provides that where a change in share holding takes place in a previous year in the case of a closely held company, no loss incurred in any year prior to the previous year in which such change takes place shall be carried forward and set off against income of that company in any subsequent year unless on the last date of the previous year the shares of that company carrying not less than 51% of the voting power were beneficially held by the same persons who beneficially held such shares on the last day of the year or years in which the loss was incurred/suffered by the company concerned. It was explained that precisely for the reason of losing the benefit of carrying forward and setting off loss in the case of Keventer the assessee-company bought back the shares in question so that Keventer does not lose the benefit of carrying forward its business losses and setting if off against its future business profit.
(iii) It was urged that the motive or purpose of a transaction, in any event, is wholly irrelevant for tax purposes. In this connection, the ld. counsel has made refere to the following decisions :
(a) Ormerods (India) Pvt.Ltd. v. CIT (1958) 36 ITR 329
(b) J.K. Commercial Corporation Ltd. v. CIT(1968) 72 ITR 296
(c) James Anderson v. CIT, 39 ITR 123
(d) Seth R. Dalmia v. CIT (1977) 110 ITR 6 (SIC)
(iv) It was also argued by the ld. counsel that in tax matter, the tax authorities are bound to consider the legal effect of the transaction in the absence of any justification of bed faith or fraud and the taxability or otherwise and the transaction has to be determined in accordance with the true legal relationship resulting from a transaction. In this connection reliance was placed on the following decisions :
(a) CIT v. B.M. Kharwar (1968) 72 ITR 603(SC)
(b) Pt. Lakshmi Kant Jha v. CIT (1969) 75 ITR 790
(c) Chittoor Motor Transport Co. P. Ltd. v. ITO (1965) 59 ITR 238
(d) K.N. Narayanan and Anr. v. ITO (1982) 145 ITR 372
(e) Abdul Kayume v. CIT (1989) 184 ITR 404
(f) CIT v. M. Ramaswami (1983) 151 ITR 122
(g) Artex Manufacturing Co. v. CIT, 131 ITR 559
(h) K.N. Narayanan v. ITO, 173 ITR 61
(i) Bombay Stam Nevigation Co. (1953) Pvt. Ltd. v. CIT 56 ITR 59
(v) It was also explained that the assessee-company admittedly had no capital gain during the year under consideration and, therefore, no set off was possible during the year under appeal and in the immediately succeeding year too. It was contended that the taxing authorities were not justified in alleging that the transactions of shares in Keventer were entered into by the assessee-company with a view to gain a tax advantage by way of set off in future inasmuch as nobody can predict future. In the instant case, the assessee-company had purchased 2 lac equity shares of Himachal Telematic Ltd. in the year ended on 31-3-94 and sold the same in the year ended 31-3-95 at a profit of Rs. 1.53 crores implying thereby that the assessee had even to known that there would be capital gain in future. It was argued that the decision of Hon'ble Supreme Court in McDowell's case has no application to the instant case. In this connection, the Ld. counsel for the assessee has placed heavy reliance on the decision of Banyan And Berry v. CIT (A) (1995) 220 ITR 831.
5. The Ld. D.R., on the other hand, supported the orders of the authorities below and contended that the transactions of sale and then re-purchase of shares of Keventer are not real and bona fide but was part of a make belief arrangement between the assessee-company and its sister concerns solely for the purpose of acquiring legal right under the provisions of the Act to carry forward the alleged loss and to set off the sane in future. It was further submitted that the assessee has resorted to colourable devices, dubious method or subterfuge. The transactions entered into by the assessee are not at all bona fide and genuine and hence have no legal effect.
6. We have considered the rival contentions of both the parties and have gone through the orders of the authorities below. We have carefully gone through the papers placed in the paper book. We have also deliberated upon the judicial decisions cited at the Bar and the principles laid down therein.
7. On reading the order of the A.O. as well as the order of the CIT(A) we find that the case of the department is that the transactions involving the sale and subsequent purchase of shares in Keventer by the assessee-company are designed to book losses for so-called potential gain in future. The conclusion made by the A.O. in this regard has already been produced in last para of pg. 3 of this order wherefrom it is clear that the A.O. has treated the whole transaction as an arranged one to book a loss for getting the benefit of setting it off in future. The CIT(A) has also clearly concluded in his order that there is no doubt that the assessee failed to establish its bona fides in respect of the share transaction in question and he was inclined to accept the findings of the A.O. that the transactions involving sale and purchase of shares of Keventer were designed to book the losses for potential gain in future. It is, therefore, incorrect to say or conclude that it is not the A.O.'s case that the transactions in respect of sale and purchase of shares of Keventer are not genuine. Though the CIT(A) has stated in his order that it is not the A.O.'s case that the transactions in respect of sale and purchase of shares of Keventer are not genuine but on reading the CIT(A)'s order as a whole and particularly para 3.3 of his order. We find that the CIT(A) has, He meant that meant to say that the transactions entered into by the assessee could be legally correct but at the same time those can be devised to gain tax advantage which is not lawful. It is not proper to pick a word or two from here and there from one's order and then to arrive at a conclusion which is not at all wannanted in the same order. In order to find out the true and correct meaning of one's order the order is to be read as a whole. On reading the A.O.'s order as well as the CIT(A)'s order, we find that the department has nowhere accepted the assessee's transaction as genuine, as seemingly valid. Therefore, the contention of the Ld. counsel that it is not the departmental case that the transactions of sale and purchase of shares of Keventer are not genuine, is of no substances and is, therefore, rejected.
8. Having perused the orders of the authorities below, the written submission made by the assessee before the CIT(A) as well as before the A.O. and on perusing the paper book filed by the assessee we find that it is an admitted fact that the assessee had promoted the Keventer as its 100% subsidiary company to carry ort the fruit juice business. There is no dispute that the assessee was a promoter of M/s. Keventer, and like the assessee-company, M/s. Keventer was also a sister company belonging to Jalan Group of Companies. It is also an admitted that the Keventer was a closely hold company. The Keventer was promoted by the assessee-company at its 100% subsidiary company in pursuance to a scheme of arrangement framed Under Section 391(2) read with Section 394 of the Companies Act, 1956 whereby and whereunder the Agro Undertaking belonging to the assessee-company was transferred to the Keventer w.e.f. 1-9-86 in terms of the order dated 1-4-87 passed by the Hon'ble High Court at Calcutta in Company petition no. 440 of 1986 connected with Company Application No. 266 of 1986. In terms of the said order the assessee-company started carrying on and running the business of the Agro Undertaking for and on behalf of Keventer w.e.f. transfer date and the project cost of the fruit juice project was approved and financed by ICICI and some other financial companies. It was also for the assessee-company to arrange or to provide Rs. 93 lacs of equity capital in terms of the stipulation with ICICI. The assessee-company, therefore, arranged Rs. 93 lacs of equity capital by entering into an agreement with Infrastructure Leasing & Financial Service Ltd. (ILFSL, for short) who agreed to subscribe for the aforesaid Rs. 93 lacs of equity capital with a condition that after expiry of 36 months but not later than 39 months, ILFSL would sell over the said shares to the assessee-company at a certain considerations to be calculated in the manner laid down in the agreement and the assessee-company shall promptly purchase the said shares from ILFSL. In terms of this buy back agreement the assessee-company purchase (SIC), 30,000 equaity shares from ILFSL @ Rs. 16.48 per share on 1-8-91, and the aggregate total consideration of Rs. 1,53,24,000/- became due and payable by the assessee-company to ILFSL. The total number of shares held by the assessee-company in Keventer were, therefore, 12,32,000 including 9,30,000 equity shares purchased by the assessee-company from ILFSL in terms of the buy back agreement. From the above discussion it is, therefore, crystal clear and not in dispute that the Keventer was promoted by the assessee-company as its 100 subsidiary in order to manufacture the fruit juice drinks by transferring its Agro manufacturing unit to Keventer. It is also not in dispute that all group companies including five buyer companies of M.K. Jalan group are sister concerns to each other.
9. Having regard to the totality of the facts and circumstances of this case we have now to see whether the transaction of sale of shares of Keventer to five sister companies and then to buy back the same from the same companies to whom they were previously sold is real and genuine and not sham, bogus or made believe.
10 In this connection, the legal position as emerging from various decisions rendered from time to time in that context are to be borne in mind and may be summarised as under :
i) The taxing authority is entitled and is indeed bound to determine the true legal relation resulting from a transaction. Motive alone cannot make unlawful what the law allows but at the same time if there is a presence of bad faith or fraud or non-bonafideness in the transaction, the taxing authorities are not bound to consider the legal effect of the transaction. If the assessee's acts are not bona fide but are ambiguous, sham or make-believe it is open to the taxing authorities to question and doubt the transaction and to find out the true, correct and real meaning and result thereof. The make-believe transactions, though seemingly legal, are not free from judicial scrutiny.
In the context of determining whether a transaction is sham or illusory or a device or a ruse or a make-believe, the taxing authorities are entitled to penetrate the veil covering it and ascertain the truth. The taxing authorities are not required to put on blinkers while looking at the documents produced before them. They are entitled to lock into the surrounding circumstances to find out the reality of the recitals made on the documents. It is the duty of the court, in every case, where ingenuity is expended to avoid taxing and welfare legislations, to get behind the smoke-screen and discover the true state of affairs. The court is not to be satisfied with the form and leave alone the substance of the transactions.
ii) The transactions should not be seen in isolation but in consonance to each other. The matter may also be considered and decided upon in the light of human probabilities and the surrounding facts and circumstances.
iii) The principle "what is apparent is real" is not sacrosanct and may be overlooked if surrounding circumstances so suggest.
iv) It is true that every person is entitled to so arrange his affairs as to avoid taxation but the arrangement must be real, genuine or bona fide and not a sham or make believe or colourable device cannot be part of tax planning and it is wrong to encourage or entertain the belief that it is honourable to avoid the payment to tax or to obtain any advantage or benefit for tax purpose by dubious method.
v) A colourable transaction is one, which is seemingly valid, but a feigned or counterfeit transaction entered into for some ulterior purposes. The transaction is to be decided as such by reference to the material or evidence or circumstances of each and every case.
vi) The principle on the matter of tax evasion and tax avoidance as laid down by Hon'ble Supreme Court in a landmark judgment in the case of McDowell and Co. Ltd. v. CTO (1985) 154 ITR 148 (SC) can have its application only where colourable or artificial devices are adopted and not to the transactions which are otherwise legitimate and are undertaken bona fide in the ordinary course of business. In other words, the McDowell's case can have its application where the devices though seemingly legal are adopted in collusion or whether devices adopted are not genuine or bona fide but are sham, make believe or camoufleged to escape the liability for the tax or to obtain certain benefit for tax purpose.
11. The contention of the Ld. counsel for the assessee that there is no case for doubting the bona fide of the assessee in first selling the total holding of shares held by it in Keventer and thereafter acquiring the same back during the same year inasmuch as because the transactions are carried out through account payee cheques and the shares in question were duly transferred in the name of respective buyer-companies and then re-transferred in the name of the assessee-company in the share register of Keventer within a very few days from the date or respective sale and purchase is, in our considered view, fit to be rejected for the reasons hereunder.
12. The observations by the A.O. made in the asst. order that the shares of Keventer were sold by the assessee-company to its sister concerns is of noteworthy inasmuch as the sister companies to whom the shares were sold by the assessee company were under the control and influence of the assessee-company as evident from the assessee-company's own averment made in the written submission filed before the CIT(A), the portion thereof is reproduced below :-
"As already stated above, because of continued losses incurred by M/s. Keventer Agro for the last several assessment years, the market value of its shares was nil in the open market and there was no willing buyer. On the other hand, as the appellant badly needed cash, it had no other alternative but to sell the shares to its sister companies over whom it had some influence."
(refer last para of page 26 of the paper book filed by the assessee) The assessee in the original ground No. 6 filed along with memorandum of appeal before this Tribunal has also admitted this position by stating as under :-
p>"That the Learned Commissioner of Income-tax (Appeals) failed to appreciate that there was no parting of control by the appellant company in Keventer Agro Ltd. in view of the admitted fact that the shares of Keventer Agro Ltd. in question had been sold by the appellant company to five companies within its group."
Though at the time of hearing of this appeal the Ld. counsel for the assessee has stated that only three of five companies were assessee's sister companies but no material or evidences has been filed by the assessee to show that the assessee had no control or influence over all the five companies. Thus from the discussion made above and in the light of the assessee-company's averment made in the written submission filed before the CIT(A) and in the original ground No. 6 of the Memorandum of Appeal filed before this Tribunal, it is clear that the assessee-company has itself admitted that the five companies belonged to the assessee-company's group and it had influence over them. It is, therefore, clear that the transactions of sale of shares and thereafter acquiring the same back from the same five sister companies is made within the same group. Further, no reason or explanation has also been filed by the assessee-company or otherwise by the five sister companies as to what prompted the five sister companies to purchase the shares of Keventer when it is the assessee's case that the Keventer had been incurring losses since its inception. In the absence of any other reason, it is difficult to imagine a person purchasing the shares of a company which has substantial accumulated losses and its shares were not saleable in the open market and there was no willing buyer as admitted by the assessee-company itself. The observation made by the CIT(A) that there appears to be no business consideration for the five companies first to purchase the shares of Keventer from the assessee-company and thereafter to sell the shares back at the same price after 7-8 months of their purchase, and as such the buyer companies did not make any commercial gain has substantial force in it. It is apparent that the five companies had acted only at the dictation of the assessee-company as clear from the conduct of five companies in first purchasing the shares as and when the assessee-company had intended to sale and then in selling the shares back to the assessee-company as and when the assessee-company had wanted so without showing or explaining any commercial consideration in support thereof. The series of transactions so effected by said five companies is not at all understandable from a commercial point of view. These said composite transactions of first purchasing the shares and then re-selling the same at the same rate by five companies is, in the facts and circumstances of the present case, fit to be disregarded in the view that the said transactions which were made within same group, had no commercial purpose but were artificially inserted to enable the assessee-company belonging to the same group to book a loss for acquiring the benefit for the test purpose.
13. The given reason of selling the total holing of shares by the assessee-company to raise funds which the assessee badly needed is also no convincing and bona fide inasmuch as the Keventer was promoted by the assessee-company at its 100% subsidiary company, its Agro undertaking unit was also transferred to Keventer and moreover the assessee-company had also entered into an agreement with the financial institution to stood as a guarantor and to part finance the fruit juice manufacturing project of the Keventer. It is to be noticed that because of selling the total holding of the assessee in the Keventer the assessee had to lose all its interest, control, management and influence over the Keventer for all the intents and purposes. It is not understood in the circumstances of the case, as to why a prudent businessman would give up its total holding in a company, which was promoted by it at its 100% subsidiary company and to which it had transferred its one important Agro undertaking/fruit juice manufacturing unit in pursuance to the scheme of arrangement approved by the Hon'ble Calcutta High Court and for which it stood as a guarantor and in which it contributed promoter's capital money merely for the reason to reduce its liability and moreover when this ultimately fraud as not materialised due to re-purchasing the sold shares. The decision of the assessee-company to sell its total holding to five group companies is against all human probabilities and commercial consideration which otherwise any prudent businessman would not have taken in normal conduct of business. Moreover, the amount raised by the assessee-company by selling the shares was only of Rs. 30,80,000/- as against the total cost of Rs. 1,83,44,100/- implying thereby that mere by realising the sum of Rs. 30,80,000/- the assessee would not have been able to liquidate at Least its liability amounting to Rs. 1,53,24,000/- due and payable by the assessee-company to ILFSL for buying back the 930000 shares of Keventer on 1-8-91 by the assessee-company from ILFSL as per agreement.
On perusal of the assessee-company's account with ILFSL, we find that the assessee-company has been able to discharge and/or pay the dues together with interest payable to ILFSL to the tune of Rs. 1,13,28,990/- during financial year 1992-93 leaving the balance payable of Rs. 11,610/- only as on 31-3-93 though it had admitted by utilised the sum of Rs. 15,40,000/- only out of sale-proceeds or shares of Keventer sold during the year for this purpose implying thereby that the assessee-company had other substantial and sufficient sources to liquidate its dues payable to ILFSL, from whom it bought back the 9,30,000 shares of Keventer as per buy-back agreement as stated above. Furthermore, we find that the shares sold by the assessee-company to five sister companies were transferred in the name of the respective buyer-companies in the share register of Keventer on 10th July, 1992, immediately after the delivery of the shares with the transfer deeds executed by the assessee-company in favour of the buyer-companies though the considerations were received by the assessee-company much thereafter i.e. on 29-7-92, 22-7-92, 28-7-92, 28-7-92 and 16-12-92 without charging any interest on the sale consideration. It is, therefore, seen that the entire transactions lacked transparency inasmuch as the transfer of shares were put though within four days from the date of the bill though no fund was actually exchanged. When it was a case of the assessee that it was in hard need of money to pay its debts and borrowings as the assessee was not able to meet its commitment in due time, it is not understood as to why the sale consideration money were not paid by the five buyer companies to the assessee-company immediately after the shares were delivered to them and also transferred in their names. It is also noteworthy to be mentioned that the speed with which the sale of shares were transferred and the formalities under the Companies Law were gone through, reveals not only the real motive of the assessee-company but also the hold which the assessee-company had over the five buyer companies belonging to the same group. Thus, in our view, the fact of transferring the shares to buyers immediately on 10-7-92 without receiving the sale consideration goes to show that it is a make believe and arranged affair. Even otherwise, the contention of the assessee that the assessee-company on account of huge interest burden started suffering losses and it was not able to meet its commitment to pay its debts and borrowings in due time is found not established by bringing any positive or adequate or sufficient material or evidences on record to that effect. It is mere a bold statement simpliciter by the assessee-company without backed by any supporting evidences, details and materials. Further, the assessee-company's subsequent conduct to purchase back the shares of the Keventer from the same five buyer companies by investing the sum of Rs. 32.08 lakhs as against Rs. 30.80 lakhs realised by way of sale would go to establish that the initial intention of the assessee-company to reduce its borrowings and interest had lost its significance as the same has been superseded or overtaken by the assessee-company's desire to save the Keventer from losing the benefit of carrying forward its business loss and setting it off against its future business profit and that too at the cost of increasing the assessee-company's own liabilities and borrowings. These two reasons shown by the assessee-company at two stages are contradictory to each other inasmuch as at one point of time the assessee-company was very much auxious to reduce its borrowings and interest burden by selling the total holding of shares in Keventer though at the other point of time the assessee-company had become so serious to save the Keventer from losing the benefit of setting off the brought forward losses against the future profit by repurchasing the shares of Keventer previously sold by it and thereby increasing again its borrowings. It is very much difficult to accept the reasons shown by the assessee-company inasmuch as there did or could arise no occasion, either in fact or in law, for the assessee-company to look after the Keventer's interest of setting off brought-forward losses as the assessee-company at that time had no holding or interest whatsoever in the Keventer by the reason of its own act of selling previously the entire holding in Keventer to five companies. The assessee-company's contention, which is mentioned in assessee's written submission filed before the CIT(A), that like it the Keventer was also a sister company belonging to the Jalan Group of company, and hence the assessee-company was interested to see that the benefit of brought forward losses is not lost to M/s. Keventer also goes to indicate the influence or control or interest the assessee-company had over the Keventer even after the alleged transfer of its entire holding in Keventer to other five sister companies. The transactions in question were thus effected by the assessee-company by making Keventer and five group companies as an unprotesting and/or obliging medium to book the alleged loss and then to acquire benefit of carrying forward the same for tax purposes. We have observed that as far as assessee's interest in Keventer is concerned, there has been, in reality, no effective change whatsoever as the assessee-company was still anxious to see that the benefit of brought forward losses is not lost to Keventer even after transferring its total holding in Keventer to five companies. We further find that the Keventer itself had no concern with regard to its right to set off brought forward losses as it is seen that the shares sold by the assessee-company to five sister companies were immediately transferred by the Keventer in its share register in spite of the applicability of Section 79 of the I.T.Act and existence of a restrictive clause in the Loan Agreement entered into by the Keventer with financial institutions whereby the Keventer was restrained by financial institution not to recognise or register any transfer of shares in Keventer if such transfer is made by the promoters, their friends and associates (See Clause (ix) of para 7.5 of the said Agreement). The basis to say that the five group companies acted as an unprotesting and/or obliging medium for the assessee company can also be easily found from another fact that the consideration money for re-selling the shares of Keventer by those five group companies to the assessee-company were paid to them after a substantial gap of time, i.e. on 10-6-93 (Rs. 16 lakh out or Rs. 32.8 lakh) and on 13-9-94 (balance Rs. 16.8 lakh) without charging any interest though the shares were re-transferred in assessee-company's name as early as on 8-3-93, i.e. much before the exchange of money.
13A. On persual of transfer deeds (placed at pages 2 to 53 of assessee's supplementary paper book) in respect of sale of shares by the assessee-company, we find that the transfer deeds were executed by the purchasers in their favour as far as back on 3-6-92 and 30-6-92 though it is the assessee's case that the shares were sold on 6-7-92 (Refer pgs. 157 to 166 of assessee's paper book) when transfer deeds also with share certificates were also delivered by the assessee-company to the respective purchasers and it, therefore, goes to establish that all these are make believe and arranged affairs. Further, the fact that the transfer deeds executed by the assessee-company in its favour at the time of re-purchasing the shares, were signed by the assessee-company on 8-3-93 and on the very same day the shares were transferred in the assessee's name in the register of Keventer shows the speed with which sale of shares were transferred and formalities under the companies law were gone through indicating their influence over each other.
14. The assessee-company's contention that in order to determine a fair price for sale of shares of Keventer, a reference was made to S.R.Batliboi & Co., C.As., to determine the fair market value as well as the fair transfer price of the shares of Keventer Agro Ltd. is also a make believe and arranged one inasmuch as on perusal of the report dated 21st May, 1992 (page 109A, B and C of the paper book) of S.R.Batliboi Consultants Pvt. Ltd., it is approached by the management of Keventer and not by the assessee-company to carry out the valuation of equity shares of the company as it was required by the management of Keventer for negotiation and determination of the purchase consideration in the event of transfer of shares between major share-holders. The Keventer's intention in obtaining the report from S.R. Batliboi Consultants Pvt. Ltd. to determine the purchase consideration in the event of transfer of shares between major share-holders goes to show that it was a pre-arrangement between the major share holders and that too with the knowledge of the Keventer to transfer the shares amongst themselves but for no adequate or justified reason. The said valuation report has neither been obtained by the assessee-company, i.e. seller nor by the five sister companies (purchasers) but it is obtained by the Keventer itself. From this discussion it is, therefore, clear that the management of Keventer was very much interested in transferring the shares in between the major share-holders in spite of the fact that (i) the Keventer had an agreement with the financial institution not to recognise or register any transfer of shares in the Keventer's capital made or to be made by the promoters, their friends or associates and (ii) the Keventer was to be hit by the provisions of Section 79 of the Act so far as its benefit to set-off the brought forward losses is concerned. We further find that the value of per share determined by S.R. Batliboi Consultants Pvt. Ltd. at Rs. 2.50 per equity share is also based on no positive or adequate material but has been taken on adhoc basis as reveals from the conclusion drawn by Batliboi in the following words :-
"The management have submitted to us, the projections for next 5 years as prepared for financial institutions and banks, wherein the company has projected operating profit from 1994-95. In such a situation prospective buyer may reap the benefits of future propitability. Based on such consideration the value per share can be taken at 25% of the face value of the shares, which works out to Rs. 2.50 per Equity Share of Rs. 10/- each of Keventer Agro Limited."
The other report dated 5-6-92 of S.R. Batliboi Consultants & Co., Chartered Accounts (page 108 and 109 of the Paper Book), and which is addressed to the Keventer, has determined the value of equity shares of Keventer at Nil as on 31-3-91 as per Rule 11 of Part-C of Schedule-III to the Wealth-tax Act, 1957. From the above it is clear that the said Chartered Accountant Firm has not given any objective criteria as to why 25% of the face value of the share can be taken as value of per share. It is mere a subjective opinion based on future profitability in the light of projection prepared for financial institutions and banks. Therefore, mere because the sale of shares has been made at a price so valued by the Chartered Accountant Firm in the manner as indicated above cannot be a basis to say that there is no reason to doubt the bona fide of the sale transaction.
15. We may also mention that the contention of the Ld. counsel for the assessee that the alleged motive or purpose of a transaction, in any event, is wholly irrelevant for tax purposes and the tax authorities are bound to consider the legal effect of the transaction and the legal effect cannot be displaced by proof into the substance of the transaction is found to be misconceived and nothing short of illusion of law, in the facts and circumstances of this case, inasmuch as the revenue's case is based on the question of genuineness of the transaction and there is a suggestion of bad faith or fraud or non-bona fideness in the transaction effected by the assessee. The Ld. counsel for the assessee's further contention that for the purpose of Section 45 of the Act the alleged motive is irrelevant inasmuch as Section 45 comes to application at the moment an assessee sells a capital asset and, therefore, the A.O. is duty bound to compute the profit/losses in accordance with the provisions of Section 45 read with Section 48 of the Act is not acceptable to us as under the I.T. Act, the tax authorities are empowered to go behind the transaction to find out the real and if a transaction, on the basis of evidence and the surrounding circumstances of the case, appears to be non-genuine or bogus or a make believe or sham with a view to avoid the tax liability or if it appears that the series of transactions effected by the assessee to achieve the desired result is sham or collusive or non-genuine, the tax authorities can ignore the transaction. Such power of tax authorities are legally recognised and are not taken away by the provisions of Section 45 or Section 48 of the Act. The plethora of decision cited by the assessee and as mentioned above are, therefore, not applicable to the instant case inasmuch as the gist of those decisions appears to us are that the tax authorities are only bound to consider the legal effect of the transaction in the absence of any suggestion of bad faith or fraud or non-bonafideness or non-genuine but not in the case where it is found that the assessee's acts are not bona fide or genuine but are ambiguous, sham or make believe affairs with a view to acquire certain benefits for the tax purpose.
16. We have also considered the decision of Hon'ble Gujarat High Court in the case of Banyan & Berry v. CIT (1996) 222 ITR 831, on which reliance has been heavily placed by the Ld. counsel for the assessee. We have also considered the decision of the Hon'ble Supreme Court in McDowell & Co. Ltd. v. CTO (1985) 154 ITR 148. The principles emerged from these two decisions are that the bona fide business arrangement with incidental fall out by way of tax benefit can be tolerated but tax avoidance or tax evasion by means of colourable device or make believe transaction and dubious means cannot be recognised. The Hon'ble Gujarat High Court in the case of Banyan & Berry (supra) has observed that if the acts are unambiguous and bona fide, but results in reduction of tax liability or expectation of tax benefit in future does not amount to colourable device, dubious method or subterfuge to avoid tad. In other words, we can say that where the transactions effected by the assessee are not bona fide or genuine but are sham, make believe, arranged one and are collusive they can be regarded as hollow and colourable device and are not to be accepted as such by the tax authorities. The facts of the present case, as discussed and observed above, clearly reveal that the transactions of first selling the shares to five sister companies and then acquiring back the same shares from the same five companies during the year under consideration are nothing but a make believe affairs and arranged one in collusion with the assessee-company's group companies resulting thereby that the principles on tax evasion or tax avoidance as laid down by the Hon'ble Supreme Court in McDowell's case are clearly applicable to the instant case. The decision of Hon'ble Gujarat High Court in the case of Banyan & Berry (supra) is, therefore, of no help to the assessee.
17. In support of our above conclusion and discussion we may also refer to the following decisions:-
(i) In the case of CIT v. Durga Prasad More (1972) 82 ITR 540 (SC), it is held that it is a well-settled principle of law that apparent must be considered real until it is shown that there are reasons to believe that the apparent is not the real. This means that what is projected by the assessee must be accepted by the authorities unless the authorities have reasons to believe that what is projected by the assessee is not genuine. For the purpose of uncovering the reality the authorities are empowered to look into the surrounding circumstances of the matter. They are also entitled to go behind the motive of the transaction.
(ii) In Sumati Dayal v. CIT (1995) 214 ITR 801 (SC), the Apex Court has held that the matter has to be considered in the light of human probabilities and the surroundering circumstances, and the Court had occasion to consider the principle "what is apparent is real" and held that this principle is not sacrosanct and may be overlooked if surrounding circumstances so suggest.
(iii) In the case of CIT v. L.N. Dalmia (1994) 27 ITR 89, the Hon'ble Calcutta High Court held the device adopted by the assessee to reduce the tax liability to be colbur and sham. In this case the Court observed as follows:-
"as discussed, the assessee effected a transaction of sale of shares held by him to the companies formed by himself holding the major part of the shares of such companies along with his nephew and wife, who held only the smaller part therein and are shown to have suffered a loss by the sale which would be a cushion against future tax liability for gains either under the revenue head or under the capital head. We have observed that as far as exercise of control of the company (Punalur Paper Mills Ltd.) there has been no change whatsoever. He continued to exercise the same control over Punalur Paper Mills Ltd. as before. This special aspect cannot be overlooked by any appellate authority dealing with tax matters. When there was no real change whatsoever, the apparent change being the transfer on the surface of shares from the individual to the company, a handmaid of the transferring individual, cannot be overlooked and we are in complete agreement with the view of the taxing authority that there was no real change and transfer claimed was a sham transfer."
It was further observed therein:-
"in context of determining whether a transaction is a sham or illusory or a device or a ruse, the income-tax authorities are entitled to penetrate the veil covering it and ascertain the truth. The taxing authorities are not required to put on blinkers while looking at the documents produced before them. They are entitled to look into the surrounding circumstances to find out the reality of the recitals made in the documents. It is the duty of the Court in every case, where ingenuity is expended to avoid taxing and welfare legislations, to get behind the smokescreen and discover the true state of affairs. The Court is not to be satisfied with the form and leave alone the substance of the transactions."
(iv) In the case of Nayantara G. Agrawak v. CIT (1994) 207 ITR 639 (Bom), the Hon'ble Court held that "the courts in such a case should not lay undue emphasis on the language of each individual document as that is not determinative of the controversy. What is really necessary to be considered in such cases is the true nature and effect of the transaction. If on such a consideration, the Court arrives at a finding that the true nature is "transfer of land" and the various steps originating from the affidavit and formation of partnership and culminating into dissolution of the same, in the process leaving the land with the company, are nothing but a device to avoid capital gains tax leviable under Section 45 of the Act on transfer of the land to the company, such a device cannot get the seal of approval of this Court. In the light of the foregoing discussion, we hold that the firm was not genuine."
(v) In the case of CIT v. Shekhawat Rajaputana Trading Co. (P) Ltd. (1999) 236 ITR 950(Cal), the jurisdictional Calcutta High Court held that. The Tribunal mainly based its findings on the ground that the consideration was received through cheque and was duly credited in the bank account of the assessee. The Tribunal did not appreciate properly the fact that the transaction was between the company and its chairman and there was no substantial credit of the parties in the bank, at the time when the cheques were issued by the assessee as well as by its chairman all upon the same bank. It has been submitted that all transactions themselves make the transaction genuine. The transaction in the instant case is between the assessee-company and its chairman, thus onus lies heavily on the assessee to prove that the transaction is genuine which, was not discharged by the assessee in the instant case, cheques were issued simultaneously by the parties in favour of each other for purchase and repurchase on the same day without both the parties having sufficient funds in the bank, that itself goes to show that the transaction was not genuine. This aspect, however, could not be explained by the assessee. Regarding sale of shares of three companies particularly J. Ltd., no evidence was produced on behalf of the assessee that there was no other buyer of the shares except its chairman, although those shares were quoted in the stock exchange. The fact that though the sale through broker of listed shares is essential under the Securities Contracts (Regulation) Act, 1956, 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 K tried to claim loss in their respective assessment for tax avoidance by fictitious transactions. Considering the totality of the facts and in the circumstances of the case, the Tribunal was not correct in law in directing the A.O. to allow the share of loss to the assessee-company.
(vi) The Income-tax Appellate Tribunal, Mumbai Bench, 'C', in the case of Bombay Oil Industries Ltd. v. Dy. CIT (Mum.) having considered the motive and timing of the transaction, commercial point of view and the transactions with a person in whom the assessee found unprotested or obliging medium to put through the series of steps envisaged for claiming the loss had held that the series of steps taken to achieve the desired results was nothing but a sham or collusive and as such the transaction cannot considered. It was also held therein that there is nothing in Sections 45 and 48 of I.T. Act so as to prevent the income-tax authorities to go behind the apparent to find out the real on the basis of evidences and surrounding circumstances of the case. The decision of Apex Court in the case of McDowell Co. Ltd. (supra) and the Hon'ble Gujarat High Court in the case of Banyan & Berry (supra) amongst others were considered by the Tribunal and thus held as follows:-
"The gist of these authorities appears to us to be that whereas tax planning can be tolerated, tax evasion by dubious means cannot be countenanced. Where the transaction put through or steps taken by the assessee need not have been taken in order to achieve a commercial result or object, and were taken only with a view of reducing the tax burden, then though such transactions or steps may be legal and actually put through, they are hollow and colorable devices. They are not then to be considered as having been undertaken necessarily for achieving the commercial object or purpose but as having been undertaken with the oblique motive of evading taxes."
18. Before parting with the issue we would like to place on record that before this Tribunal the assessee-company has not furnished necessary details, evidences and particulars as to the persons from whom and the manner in which 2 lakhs shares of Himachal Telemetic Ltd. (in short HTL) were purchased by the assessee during the financial year ending 31st March 94 and then sold later on during the year ending on 31-3-95 nor the assessee had furnished the same before the lower authorities. The assessee has, therefore, failed to establish that the capital gains arising out of sale of shares of HTL were bona fide and not arranged one. Be it clarified that even otherwise, this aspect of the matter is not the determining factor to decide the issue in hand when it is found by us that the loss claimed by the assessee in the said transaction in question is not bona fide or genuine but an arranged or make believe affairs.
19. In the light of the discussions and observations made above and for all above reasons, we hold that -
(i) the bona fides and genuineness of the transactions in question effected by the assessee during the year under consideration have not been satisfactorily and properly proved by the assessee company though it is apparent that the onus lies heavily on the assessee to prove that the transaction is genuine as because the transaction in the instant case was between the assessee-company and its sister companies belong to the same Group,
(ii) the transactions effected by the assessee-company are not bona fide commercial transaction but are sham, bogus, unreal, make believe, collusive and artificial arrangement with a mala fide intention to acquire benefit for tax purposes; and
(iii) therefore, the effect of the said transaction, though seemingly legal, are fit to be disregarded.
20. In the ultimate analysis we hold that the action of the A.O., which has been confirmed by the CIT(A), in disallowing the loss of Rs. 1,68,12,637/- claimed by the assessee-company was justified and in order.
21. In the result, this ground No. 1 is decided against the assessee and the CIT(A)'s order on this issue is upheld.
22. Gr.No. 2 reads as under:-
"That the Ld. CIT(A) erred in confirming the disallowance of Rs. 12,31,941/- representing interest paid/payable to Infrastructure Leasing & Financial Services Ltd. on account of delayed payment of initial purchase consideration by the appellant company in terms of buy back agreement for the shares of Keventer Agro Ltd."
At the time of hearing it has been pointed out by the Ld.D.R. that the similar issue had come for consideration before I.T.A.T., 'E' Bench, Calcutta, in the assessee's own case (ITA No. 6(Cal)/98) relevant to A.Y. 1992-93 and facts and circumstances of the case in this appeal are similar to that of the A.Y. 1992-93. On the other hand, the Ld. counsel for the assessee has argued that the Tribunal has not decided the issue in its right and correct prospective in A.Y. 1992-93. We have gone though the order of the Tribunal for A.Y. 1992-93 as referred above and find that the issue involved in this appeal is similar to that of the issue involved in A.Y. 1992-93. The facts and circumstances of the case are similar and respectfully following the decision of the Tribunal in the assessee's own case in the immediately preceding assessment year 1992-93 we decide the issue against the assessee for the reasons as given by the Tribunal in the appeal for A.Y. 1992-93. This ground No. 2 is also decided against the assessee.
23. In the result, the appeal filed by the assessee is dismissed.
ITA No. 345(Cal)/2001:
24. The only ground in this appeal pertaining to A.Y. 1995-96 is as under:
"That the Ld. CIT(A) erred in confirming the order of the Ld. A.O. denying the appellant the benefit of brought forward capital loss of Rs. 1,68,12,637/- relating to A.Y. 1993-94 and set off the same with the capital gain which arose to the appellant in the A.Y. 1995-96."
This issue involved in this appeal has come for our consideration in A.Y. 1993-94 and for the reasons discussed elaborately in this same order, we decide the issue in favour of the revenue and against the assessee. The order of the CIT(A) on this issue is, therefore, upheld.
25. In the result, the appeal for A.Y. 1995-96 is also dismissed.