Income Tax Appellate Tribunal - Ahmedabad
The Dy. Commissioner Of Income-Tax vs Bijal Investment Co. Pvt. Ltd. on 28 October, 2005
Equivalent citations: [2007]108ITD432(AHD), [2008]303ITR350(AHD), (2007)109TTJ(AHD)65
ORDER
Sanjay Arora, Accountant Member
1. This is an appeal by the Revenue directed against the order of the Commissioner of Income-tax (Appeals)-III, Ahmedabad ("CIT(A)" for short) dated 1-2-2000, and the assessment year under reference is (A.Y.) 1995-96.
2. The only effective ground of appeal relates to the deletion of disallowance of long term capital loss of Rs. 19,61,617 incurred by the assessee on sale of 27410 equity shares in Rustom Mills & Industries Ltd. ("RMIL" for short), a sister concern, by the learned CIT(A) vide the impugned order, as:
1. The ld. CIT(A) has erred in law and on facts in deleting the disallowance of long term capital loss of Rs. 19,61,617/- incurred to the assessee on sale of 27,410 equity shares of RMIL to its sister concern.
3.1 The facts of the case are that the assessee earned a short-term and long-term capital gain of Rs. 23,87,553 during the relevant previous year, being financial year 1994-95, as also incurred a long-term capital loss of Rs. 25,03,417, including the impugned loss of Rs. 19,61,617. The A.O., during the course of assessment proceedings, observed in respect of this loss, as under:
(a) RMIL, a group concern, was a sick company and under liquidation through the process of being wound-up under the supervision of the jurisdictional High Court;
(b) The shares stood sold only at the fag-end of the previous year, i.e., on 21-3-1995, at a consideration of Rs. 1 per share, to M/s. Arohi Consultants Pvt. Ltd., another sister concern;
(c) The said shares stood sold, through a 'Deed of Assignment', and sans the physical delivery of the relevant share certificates, being in the possession of IDBI, to which the same stood pledged since 4-9-1987 to secure the financial assistance by IDBI to RMIL, and to which transaction the asses see-company was/is a guarantor/surety;
(d) Section 536(2) of the Companies Act, 1956 proclaims any transfer of shares in a company, or alteration in the status of its members, after the commencement of its winding-up, as void, unless ordered otherwise by the Court.
3.2 He, therefore, proceed to disallow the loss arising on the sale of the shares of RMIL (being 27,410 in number) amounting to Rs. 19,61,617. In doing so, he placed reliance on the opinion of the Official Liquidator ("OL" for short) (attached to the High Court of Gujarat) regarding the status of the transfer effected by the Deed of Assignment in the eyes of law, and who, per communication dated 5-2-1998, stated the same as being void under law, in view of Section 536(2) of the Companies Act, 1956, with no effect or consequence flowing therefrom (Para 2.4 of the Assessment order). The said Deed was thus inferred by him as an illegal document, with no basis in law, further holding w.r.t. a judgment of the Hon'ble Supreme Court (Ahmed G.H. Ariff v. CWT , that the transfer of shares would include the transfer of any rights in shares, being the right in the surplus arising out of liquidation proceedings, as also contended by the assessee, so that the same having been declared as void Under Section 536(2) of the Companies Act, 1956, there was no question of any capital gain or loss arising out of the transaction(s) of said transfer. Aggrieved, the assessee preferred an appeal before the learned CIT(A).
3.3 Before the learned CIT(A), the assessee contended that the shares under question being fully paid-up, it cannot be called upon to contribute to the assets of the company under liquidation, so that the Court cannot inquire into the adequacy of the price or consideration of such fully paid-up shares, which would fall under the definition of property Under Section 6 of the Transfer of Property Act, besides being an actionable claim in terms of Section 3 of the said Act. It was further stated that what has been transferred through the medium of 'Deed of Assignment' was not the shares but the property or the capital asset in the said shares and which in the instant case would imply the right to receive the dividend that may be declared by the OL, or the surplus arising on the disposal of assets in liquidation proceedings. As such, there has only been a substitution in-as-much as instead of the appellant-company receiving the same from the OL, has received it from the Assignee, and being attributable only to the capital (there being no dividend) gave rise to loss under the head 'Capital gains'. It further stated that the transaction being real and genuine, it could not be ignored only because it resulted in a loss and thus in reducing the assessee's tax burden. Further reliance was placed on the decision of the Ahmedabad Bench of ITAT in the case of Biraj Investments Pvt. Ltd., another sister concern, for A.Y. 1993-94 (ITA No. 1329/Ahd/1998 dated 15-9-1999), where the ITAT held, following the decision of the Hon'ble Madras High Court in the case of A.M. P. Arunachalam v. A.R. Krishnamurthy and Ors. (1979) 49 Company Cases 622, that the pledge of shares would not abrogate the right of the assessee to transfer the pledged shares; it holding a clear title thereto. Following the said decision of the ITAT, the learned CIT(A) upheld the assessee's claim, directing the allowance of the long term-capital loss aforesaid.
4. Before us, while the learned D.R. placed complete reliance on the order of the A.O., the learned A.R. reiterated the contentions before the lower authorities, contending the matter to be fully covered by the decision of the ITAT in the case of Biraj Investments Pvt. Ltd. (supra).
5. We have heard the rival submissions and perused the material on record, as also the case law cited.
5.1 At the outset, we find that the Hon'ble Gujarat High Court had ordered the winding-up of RMIL vide its order dated 14-10-1993. As such, the facts of the present case are distinguishable from that of the case before the ITAT in the case of Biraj Investments Pvt. Ltd.(supra) and also that before the Hon'ble Madras High Court in the case of A.M. P. Arunachalam v. A.R. Krishnamurthy and Ors. (supra). Section 536 Sub-section (2) of the Companies Act, 1956 reads as:
(2) In the case of a winding up by or subject to the supervision of the Court, any disposition of the property (including actionable claims) of the company, and any transfer of shares in the company or alteration in the status of its members, made after the commencement of the winding up, shall, unless the Court otherwise orders, be void.
5.2 Further, Section 428 of the Companies Act defines the term 'contributory', i.e., a person who may, under given circumstances, be called upon to contribute to the assets of the company in the event of its being wound-up, and is also entitled to any surplus arising out of the disposal of the assets of the company, thus:
428. The term "contributory" means, every person liable to contribute to the assets of a company in the event of its being wound up, and includes the holder of any shares which are fully paid-up; and for the purposes of all proceedings for determining, and all proceedings prior to the final determination of, the persons who are to be deemed contributories, includes any person alleged to be a contributory.
5.3 In view of the above definition which specifically includes a holder of fully paid-up shares in the company being wound-up, the assessee's contention that in view of Section 426(1)(d) of the Act, which restricts the liability of a member of a company being wound-up to the amount, if any, unpaid on the shares in respect of which it is a member, would not, thereby obviate, or cause to nullify or render nugatory, the effect of Section 536(2) of the Companies Act, which shall have effect, as also confirmed by the OL, with all its incidental effects and consequences. The assessee has pressed an argument that it has, instead of receiving from the OL, received from the Assignee the value of the property in the said shares. However, this claim is not tenable, as the said Assignee, not being registered in the records of the liquidating company (OL) as a holder of the assigned shares, it is it which would stand to receive any surplus arising on the disposal of the assets of the company from the OL. Besides, the assessee having pledged the impugned shares in favour of IDBI in (part) performance of its liability thereto, it is the said Pledgee who would, in law, be entitled to or have the right in the said surplus, and not the assessee-company, or the Assignee-company which derives it's right therefrom, i.e., to the extent the assessee-company is liable to the Pledgee or IDBI.
5.4 Further, this issue, we find can also be viewed from another angle. The assigned shares being encumbered to the extent of the liability guaranteed by the assessee-company to IDBI, what could be assigned, even 'assuming' such a transfer to be valid, is the residuary rights in the said shares, which (shares) can only be considered as a composite/amalgam of the entire bundle of rights associated therewith. As such, what the assessee stands 'transferred' is such residuary rights in the impugned shares, the cost of which is not ascertainable with reference to the provisions of the Income-tax Act, 1961. So that following the ratio of the Hon'ble Supreme Court in the case of Sunil Siddharthbhai v. CIT 156 ITR 509 that if the machinery provision(s) of law does not provide for or envisage the working in a given circumstance/situation, the said transaction ought to be considered as outside the ambit of the charging provision of the said Act. Here it may also be pertinent to state that in the case before the Hon'ble Madras High Court in A.M. P. Arunachalam's case (supra), where the rights of the Pledgee of shares in a company stand discussed, the transferee, along with the request (to the Pledgee) for transfer of shares in its name, also sought to discharge the entire liability to the Pledgee in respect of which the said shares stood pledged, so that it had no surviving right in those shares, i.e., the transfer (being sought) would operate to transfer the entire property in the said shares, while in the present case, what is sought to be transferred, admittedly, per the Deed of Assignment, is only the limited/residuary rights in the pledged shares.
6. In view of the foregoing, we hold that the Assessing Officer was justified in treating the transfer of the impugned (27410) shares as not valid in the eyes of law, and thus, ignoring the loss arising therefrom. The order of the learned CIT(A) is reversed. We order accordingly.
7. The grounds No. 2 and 3 of the appeal (as also No. 1, in part) challenge the order of the learned CIT(A) in the facts of the case. While we have rendered our decision on the basis as stated in the order as above, we find that the learned CIT(A) has not discussed in his order another important aspect of the matter, i.e., of the A.O. considering the transaction of transfer of the impugned shares as a subterfuge, being only a tax saving device employed by the assessee. And which, under the facts and circumstances of the case, would merit consideration, and ought to have been a subject matter of his definite finding(s) in his order. This is so as the assigned shares are in a sick company undergoing the (legal) process of being wound-up by the Court, and what stands sold (at a consideration of Re. 1 per share), admittedly, is only the residuary rights in those shares; the Pledgee having a aprori right to any dividend and/or surplus declared by the OL (to the extent of amount guaranteed), so that, under the peculiar circumstances, it could well be a case of a non-genuine or camouflaged transaction. And more particularly, as he had accepted the assessee-company's claim of the transfer of shares as valid in law. Nevertheless, having already rendered our decision in the matter, on the basis that it is not so, we do not consider necessary the resolution of this aspect of the matter, for which reference to some primary facts would be necessary, and consequently, for restoration of this matter to the file of the learned CIT(A). These grounds are, thus, disposed off accordingly.
8. In the result, the Revenue's appeal is allowed.