Income Tax Appellate Tribunal - Mumbai
Killick Nixon Ltd , Mum vs Assessee
IN THE INCOME TAX APPELLATE TRIBUNAL,
MUMBAI BENCH 'C', MUMBAI
Before Shri R.V. Easwar, Senior Vice-President and
Shri T.R. Sood, Accountant Member
I.T.A.No. 746/Mum/2005
Assessment Year: 2001-02
M/s. Killick Nixon Ltd., Dy. Commissioner of Income-tax,
Basement, Commercial Union House, Central Circle-3, 9th floor,
9, Wallace Street, Fort, Vs. CGO Building, Mumbai 400 020.
Mumbai 400 001.
PAN: AAACK 8526 A
(Appellant) (Respondent)
I.T.A.No. 883/Mum/2005
Assessment Year: 2001-02
Dy. Commissioner of Income-tax, M/s. Killick Nixon Ltd.,
Central Circle-3, 9th floor, Basement, Commercial Union House,
CGO Building, Mumbai 400 020. Vs. 9, Wallace Street, Fort,
Mumbai 400 001.
PAN: AAACK 8526 A
(Appellant) (Respondent)
Assessee by : Shri Vijay Kothari
Revenue by : Shri Yeshwant U. Chavan
ORDER
PER T.R. SOOD, AM:
These cross appeals by the assessee and the Revenue are directed against the order of the learned Commissioner of Income-tax (Appeals) Central-I, Mumbai dated 25.11.2004 and relate to the assessment year 2001-02. They were heard together and are being disposed of by this consolidated order. ITA No.746/M/05 (Assessee's appeal):
2. In this appeal the assessee has raised the following grounds:
"1.(a) The learned Commissioner of Income-tax (Appeals) has erred in confirming the disallowance of short term capital loss of Rs. 46,40,00,000/- on sale of shares of Metterhorn Investments Ltd., Montblanc Investments Ltd., Fircrest investments Ltd. and Galactica Investments Limited.
(b) The Learned CIT(A) has erred in confirming the disallowance of long term capital loss of Rs. 92,41,224/- on sale of shares of Matterhorn 2 ITA No.746 & 883/M/08 M/s. Killick Nixon l:td.
Investments Ltd., Fircrest investments Ltd. and Galactica Investments Limited.
(c) The Learned CIT(A) has erred in concluding that sale of shares of Killick Halco Ltd. resulted in a short term capital gain of Rs. 80,80,640/-. He ought to have held that the said sale resulted in a short term capital loss of Rs. 3,09,26,000/-.
(d) The Ld. CIT(A) has erred in confirming the disallowance of long term capital loss on sale of shares of Pelican paints Ltd. of Rs. 1,68,37,861/-.
(e) The Ld.CIT(A) has erred in confirming that investment in shares, their sales and loan transactions were sham transactions.
2. The Ld. CIT(A) has erred in assessing the long term capital gain on acquisition of mortgaged land by Vyasa Bank in pursuance to the agreement dated 4.4.1996.
Without prejudice to above:
(a) The Ld.CIT(A) has erred in not holding that the reference made by the Assessing officer to the valuation cell u/s.55A(a) was not in accordance with law.
(b) The Ld.CIT(A) has erred in confirming the disallowance of Rupees one crore being the amount of expenses incurred for the eviction of unauthorized occupants of the land. It is submitted that the said amount constituted an expenditure for the improvement of the property in question and therefore ought to have been allowed.
(c) The Ld.CIT(A) has erred in directing that while computing capital gains, fair market value of the property as on April 01, 1981 should be taken as determined by District Valuation Officer and not as determined in the Valuation Report furnished by the appellants.
3. The Ld.CIT(A) has erred in not allowing Rs.10.5 crores being the amount of loss suffered by the Appellants on account of invocation of guaranty against them and consequent take over of the mortgaged land by the Vysa Bank.
4. The Ld. CIT(A) has erred in confirming the disallowance of secret commission of Rs. 1,15,25,000/-. The said expenditure was incurred I the normal course of business for furtherance of Company's commercial interest.
5. The Ld.CIT(A) has erred in confirming the disallowance of interest amounting to Rs. 1,61,33,800/-. It is respectfully submitted that the interest free loans were given by the appellants out of their own resources.
6. The Ld.CIT(A) has erred in confirming the levy interest u/s. 234B & 234C of the Income-Tax Act, 1961.
3 ITA No.746 & 883/M/08
M/s. Killick Nixon l:td.
3. As regards ground No.1 is concerned, the A.O. during assessment proceedings noticed that the assessee had declared long term capital gains in the return amounting to Rs. 49,73,09,059/- against which the assessee company had claimed capital loss (long term) at Rs.1,45,90,951/- and short term capital loss at Rs. 49,49,26,000/-. The Assessing Officer had doubts that losses have simply been generated to avoid tax liability, therefore, he made detailed enquiries in respect of these capital loses. He noted that assessee company which was a cash starved company finalized an idea of investing of a sum of Rs. 48 crores in four companies in a period of 3 days from 28.3.2000 to 30.03.2000 as per the details given below:
Sr. Name of the party Amount No. of new 31.3.90 Total Capital No. (including shares 31.3.92 (100% holding of % Premium of subscription (100% Holding) Killick Nixon holding Rs.140) (during the Holding Ltd.
F.Y.1999-2000
1. Matterhorn Investments 12.03 cr. 800,000 149,998 2 950,000 100% Pvt.Ltd.
2. Montblanc Investments 12.03 cr. 800,000 149,998 2 950,000 100% Pvt.Ltd.
3. Fircrest Investments 12.03 cr. 800,000 149,998 2 950,000 100% Pvt.Ltd.
4. Galactica Investment 12.03 cr. 800,000 149,998 2 950,000 100% Ltd.
48.12 cr.
4. As noted from the above chart these investments were made in the companies which were already 100% owned by the company. The Assessing Officer further noted that as per the submission of the assessee the money came from the following entities:
1 GKAK Rathi HUF 34.87 crores (28/3 to 30/3) 2 Subahu Investment Ltd. 5.50 crores (28/3)
3. Viplav Trading Ltd. 1.30 crores (30/3)
4. Kosha Investments 6.325 crores (29/3/00) (balances) 48.00 crores
5. It may be noted that the main person in above entities is a person named Shri G.K. Rathi, who, in turn, having the concerns by the name of M/s. Geekay Exim (India) Ltd. and Viplay Trading Ltd., and Sabara Impex Ltd. It was also noted that he is the same person in favour of whom the company had issued a guarantee for a large 4 ITA No.746 & 883/M/08 M/s. Killick Nixon l:td.
sum which was ultimately defaulted and company had to suffer a huge loss which further generated doubts in the minds of the Assessing Officer and further enquiries were made. (This aspect is discussed in detail in ground No. 3 which has been adjudicated in later paragraphs). In this respect bank accounts of these subsidiary companies were analysed and the details have been noted by the Assessing Officer at paras 5.5.
"5.5 The assessee's money was thus invested in these four companies in their new accounts opened in Global Trust Bank the account of Killick Nixon Ltd, and its group concerns and G K Rathi Group were already there. The relevant bank statement wherein the share subscription money was deposited in the bank account of these subsidiary companies of the assessee is reproduced under:
(A) MONTBLANC INVESTMENT LTD.
GLOBAL TRUST BANK LIMITED YOUR
ACCOUNT
UPDATE
NARIMAN POINT, MUMBAI DATE PAGE NUMBER
03-04-2000 1
M/s MONTBLANC INVESTMENT ACCOUNT CATEGORY ACCOUNT NUMBER
LIMITED, KILLICK HOUSE,
KILLICK ESTATE, BAJI PASAL- CURRENT ACCOUNT 2000101908 INR
KAR MARG, CHANDIVALI, - GENERAL
MUMBAI, MAHARASHTRA
INDIA -400 072
STATEMENT OF ACCOUNT FOR THE PERIOD 01-03-2000 TO 31-03-2000 Date Details Cheque Debited Credited Balance No. 01-MAR B/F 0 28-MAR CASH DEP 10,000 10,000 28-MAR MICR CHEQUES CHARGES 100 9,900 30-MAR TRF FM KILLICK NIXON 27,500,000 27,509,900 30-MAR TRF FM KILLICK NIXON 10,375,000 37,884,900 30-MAR TRF TO KOSHA INVEST 479154' 27,500,000 10,384,900 30-MAR TRF TO KOSHA INVEST 479155' 10,375,000 9,900 30-MAR TRF FM KILLICK NIXON 27,500,000 27,509,900 30-MAR TRF TO KOSHA INVEST 479153' 27,500,000 9,900 30-MAR TRF FM KILLICK NIXON 27,500,000 27,509,900 30-MAR TRF TO KOSHA INVEST 479151' 27,500,000 9,900 30-MAR TRF FM KILLICK NIXON 27,500,000 27,509,900 30-MAR TRF TO KOSHA INVEST 479152' 27,500,000 9,900 31-MAR L.F. CHARGES 9,800 Page Total 120,375,200 120,385,000 9,800 The account was opened from a Cash deposit of Rs.10,000/-. The money in this bank account came on 30th March (12.03 crores) and on the same day of deposit was transferred all to M/s Kosha Investment and the balance left as on 31.3.2000 was Rs 9,800/-. The amount of Rs 10,000/- also came from M/s Kosha Investment Ltd.5 ITA No.746 & 883/M/08
M/s. Killick Nixon l:td.
(B) FIRCREST INVESTMENT PVT. LTD.
GLOBAL TRUST BANK LIMITED YOUR
ACCOUNT
UPDATE
NARIMAN POINT, MUMBAI DATE PAGE NUMBER
03-04-2000 1
M/s MONTBLANC INVESTMENT ACCOUNT CATEGORY ACCOUNT NUMBER
LIMITED, KILLICK HOUSE,
KILLICK ESTATE, BAJI PASAL- CURRENT ACCOUNT 2000101906 INR
KAR MARG, CHANDIVALI, - GENERAL
MUMBAI, MAHARASHTRA
INDIA -400 072
STATEMENT OF ACCOUNT FOR THE PERIOD 01-03-2000 TO 31-03-2000 Date Details Cheque Debited Credited Balance No. 01-MAR B/F 0 28-MAR CASH DEP 10,000 10,000 28-MAR MICR CHEQUES CHARGES 100 9,900 29-MAR TRF FM KILLICK NIXON 27,500,000 27,509,900 29-MAR TRF TO KOSHA INVEST 479051' 27,500,000 9,900 29-MAR TRF FM KILLICK NIXON 27,500,000 27,509,900 29-MAR TRF TO KOSHA INVEST 479153' 27,500,000 9,900 29-MAR TRF FM KILLICK NIXON 27,500,000 27,509,900 29-MAR TRF TO KOSHA INVEST 479052' 27,500,000 9,900 29-MAR TRF FM PRO KILLICK NIX 27,500,000 27,509,900 29-MAR TRF TO KOSHA INVEST 479154' 27,500,000 9,900 30-MAR TRF FM KILLICK NIXON 10,375,000 10,375,000 30-MAR TRF TO KOSHA INVEST 479055' 10,375,000 9,900 31-MAR L.F. CHARGES 100 9,800 Page Total 120,375,200 120,385,000 9800 The amount was opened with a Cash deposit of Rs 10,000/-. The money in this bank account came on 29th March (11 crores) and 30th March (1.03 crore) and on the same day of deposit was transferred to M/s Kosha Investment and the balance left was Rs 9,800/-
(C) MATTERHORN INVESTMENTS PVT LTD.
GLOBAL TRUST BANK LIMITED YOUR
ACCOUNT
UPDATE
NARIMAN POINT, MUMBAI DATE PAGE NUMBER
03-04-2000 1
M/s MONTBLANC INVESTMENT ACCOUNT CATEGORY ACCOUNT NUMBER
LIMITED, KILLICK HOUSE,
KILLICK ESTATE, BAJI PASAL- CURRENT ACCOUNT 2000101905 INR
KAR MARG, CHANDIVALI, - GENERAL
MUMBAI, MAHARASHTRA
INDIA -400 072
STATEMENT OF ACCOUNT FOR THE PERIOD 01-03-2000 TO 31-03-2000 Date Details Cheque Debited Credited Balance No. 01-MAR B/F 0 28-MAR CASH DEP 10,000 10,000 28-MAR TRF FM KILLICK NIXON 27,500,000 27,500,000 28-MAR MICR CHEQUE CHARGES 100 27,509,900 28-MAR TRF TO KOSHA INVEST 479101' 27,500,000 9,900 28-MAR TRF FM KILLICK NIXON 27,500,000 27,509,900 28-MAR TRF TO KOSHA INVEST 479104' 27,500,000 9,900 28-MAR TRF FM KILLICK NIXON 27,500,000 27,509,900 6 ITA No.746 & 883/M/08 M/s. Killick Nixon l:td.
28-MAR TRF TO KOSHA INVEST 479103' 27,500,000 9,900 28-MAR TRF FM PRO KILLICK NIX 27,500,000 27,509,900 28-MAR TRF TO KOSHA INVEST 479102' 27,500,000 9,900 30-MAR TRF FM KILLICK NIXON 10,375,000 10,375,000 30-MAR TRF TO KOSHA INVEST 479105' 10,375,000 9,900 31-MAR L.F. CHARTGES 100 9,800 Page Total 120,375,200 120,385,000 9800 The account was opened with a Cash deposit of Rs.10,000/-. The money in this bank account came on 28th March (11 crores) and 30th March (1.03 crore) on the same day of deposit was transferred all to M/s Kosha Investment and the balance left was Rs 9,800/-.
(D) M/s. GALACTICA INVESTMENTS PVT LTD.
GLOBAL TRUST BANK LIMITED YOUR
ACCOUNT
UPDATE
NARIMAN POINT, MUMBAI DATE PAGE NUMBER
03-04-2000 1
M/s MONTBLANC INVESTMENT ACCOUNT CATEGORY ACCOUNT NUMBER
LIMITED, KILLICK HOUSE,
KILLICK ESTATE, BAJI PASAL- CURRENT ACCOUNT 2000101907 INR
KAR MARG, CHANDIVALI, - GENERAL
MUMBAI, MAHARASHTRA
INDIA -400 072
STATEMENT OF ACCOUNT FOR THE PERIOD 01-03-2000 TO 31-03-2000 Date Details Cheque Debited Credited Balance No. 01-MAR B/F 0 28-MAR CASH DEP 10,000 10,000 28-MAR MICR CHEQUES CHARGES 100 9,900 30-MAR TRF FM KILLICK NIXON 27,500,000 27,509,900 30-MAR TRF TO KOSHA INVEST 479004' 27,500,000 9,900 30-MAR TRF FM KILLICK NIXON 27,500,000 27,509,900 30-MAR TRF TO KOSHA INVEST 479003' 27,500,000 9,900 30-MAR TRF FM KILLICK NIXON 27,500,000 27,509,900 30-MAR TRF TO KOSHA INVEST 479002' 27,500,000 9,900 30-MAR TRF FM PRO KILLICK NIX 27,500,000 27,509,900 30-MAR TRF TO KOSHA INVEST 579001' 27,500,000 9,900 30-MAR TRF FM KILLICK NIXON 10,375,000 10,375,000 30-MAR TRF TO KOSHA INVEST 479005' 10,375,000 9,900 31-MAR L.F. CHARTGES 100 9,800 Page Total 120,375,200 120,385,000 9800 Page Total 120,375,200 120,385,000 9800 The account was opened with a Cash deposit of Rs.10,000/-. The money in this bank account came on 28th March (11 crores) and 30th March (1.03 crore) on the same day of deposit was transferred all to M/s Kosha Investment and the balance left was Rs 9,800/-.
From the above it will be seen that all the four companies are having the same address as the assessee has. Their address is stated as Killick House. The money received from the assessee was transferred to M/s Kosha Investment (a practical sister concern of the assessee)."
6. According to the Assessing Officer this sudden idea of the investment was clearly floated just to set off the capital gains on sale of land by making investment in these four non-active companies at a premium of Rs. 140/- per share. He further 7 ITA No.746 & 883/M/08 M/s. Killick Nixon l:td.
noted that in turn, these companies subscribed into shares of Kosha Investment Ltd. which was a loss making company. It was also noted that the money which had gone to the accounts of four companies vanished within two days. To ascertain further details a statement of one Shri G.R. Vora, who was the director in all the four companies was recorded under section 131 of the Act. The conclusion reached by the Assessing Officer on the basis of this statement have been extracted at para 5.10 which reads as under:
"From this statement it is very clear that the director Mr. Vora had no role to play in these four companies, being a nominee and was merely following directions of management of Killick Nixon Ltd., the holding company of these four investment company and he has also stated the activities were very nominal in nature, also as none of these companies were holding any valuable asset that would attract investment at a premium. So these companies can be merely called as a vehicle used by M/s.Killick Nixon Ltd., to show investment and it is also a confirmed fact now that the instructions of further investment in Kosha Investment Ltd., was also of the management of Killick Nixon Ltd., so, it can be safely concluded that there were front companies which were used as a vehicle for investment in loss making Kosha Investment ltd., so that a direct nexus may not be apparently seen between Killick Nixon Ltd., and Kosha Investment Ltd., and one more important thing to observe here is that the director is still unaware, of the stated to be present holder of shares of these four investment companies (M/s.Shree Radha Financial Services Pvt. Ltd.). The director has stated the address of this party was taken from management of M/s. Killick Nixon Ltd., which implies that no representative of Shree Radha financial Services Pvt. Ltd., ever appeared inspite of holding more than 99% shares of this company. This leads to a doubt that even the share transactions, that is the sale of shares is a dubious one and is discussed in the later paragraphs."
7. While looking into second step or the next log of the investment in M/s. Kosha Investments Ltd., it was noticed that, in turn, returned the share application money to the following parties:
Sr.No. Name Amount
1. Snowchem India Ltd. 110,000,000
2. Killick Nixon Ltd. 122,025,000
3. Gopal Krishna Anujkumar Rathi HUF 89,000,000
4. Subahu Investments Pvt.Ltd. 113,100,000
5. Sabara Impex Limited 46,625,000
6. Shashak Noble Metals Ltd. 6,500,000
7. Geekay Exim Pvt. Ltd. 7,500,000
8. Stallion Investments Pvt. Ltd. 7,500,000
Total 502,250,000
8 ITA No.746 & 883/M/08
M/s. Killick Nixon l:td.
8. Thus four subsidiary companies, Matterhorn Invetments Ltd., Fircrest Investments Ltd., Galatica Investments Ltd. and Montlblanc Investments Ltd., had made investments in another company known as Kosha investments ltd., and Kosha Investments Ltd., returned the money to various persons namely, (1) assessee i.e. Killick Nixon Ltd., (2) Sabara Impex Ltd., (3) Geekay Exim Pvt. Ltd., (4)Subahu Investments (5) Snowcem India Ltd., (6) Shashak Noble Metals Ltd., (7) Stallion Investments Pvt. Ltd., (8) Gopal Krishna Anujkumar Rathi HUF. The Assessing Officer wondered how the sum of Rs. 4.66 crores could be given to Sabara Impex Ltd., and another sum of Rs. 0.75 crores to M/s. Geekay Exim Pvt. Ltd., who were mainly responsible for depriving the assessee of its huge land through guarantee issued in their favour, Vyasya Bank Ltd., which was ultimately settled through selling of land. Then, it was noted that M/s. Kosha Investments Ltd., who became flush with money but nothing fruitful happened and the money vanished from its account also. For this, the Assessing Officer had extracted the copy of the bank account of Kosa Investment Ltd. with Global Trust Bank Ltd., which reads as under:
GLOBAL TRUST BANK LIMITED YOUR
ACCOUNT
UPDATE
NARIMAN POINT, MUMBAI DATE PAGE NUMBER
03-04-2000 1
M/s. KOSHA INVESTMENTS ACCOUNT CATEGORY ACCOUNT NUMBER
LIMITED
BLOCK NO. 19, ST FLOOR, CURRENT ACCOUNT 2000101644 INR
DHANRAJ MILLS COMPOUND, - GENERAL
SITARAM JADHV ROAD,
MUMBAI, MAHRASHTRA, INDIA
-400 072
STATEMENT OF ACCOUNT FOR THE PERIOD 01-03-2000 TO 31-03-2000 Date Details Cheque Debited Credited Balance No. 28 Mar CASH DEP 900,000 901,696.69 28TH March TRF FM MTTERHORN 27,500,000 28,401,696.69 28th March TRF TO GKAK RATHI 330768 27,500,000 901,696.69 28th March TRF FM MATTERHORN 27,500,000 28,401,696.69 28th March TRF TO SUBAHU INVEST 330770 27,500,000 901,696.69 28th March TRF FM MTTERHORN 27,500,000 28,401,696.69 28th March TRF TO GKAK RATHI 330767 27,500,000 901,696.69 28th March DD REALISED 50,000 951,696.69 28th March TRF FM MTTERHORN 27,500,000 28,4511,696.69 28th March TRF TO SUBAHU NVEST 330769 27,500,000 951,696.69 29th March CASH DE 1,000,000 1,951,696.69 9 ITA No.746 & 883/M/08 M/s. Killick Nixon l:td.
29th March UNDER TRNS.DAULAT 330763 1,40,000 551,696.69 EXIM 29th March TRFF FM FIRCREST 27,500,000 28,051,696.69 29th March TRF TO SUBAHU INVEST 330751 27,500,000 551,696.69 29th March TRF FM FIRCREST INVES 27,500,000 28,051,696.69 29th March TRF TO SUBAHU 330752 27,500,000 551,696.69 29th March TRF TO FIRCREST INVES 27,500,000 28,051,696.69 29th March TRF TO SUBAHU 330753 27,500,000 551,696.69 29th March CASH DEP 800,000 1,351,696.69 29th March TRF TO SUBAHU 700,000 2,051,696.69 29th March CASH DEP 500,000 2,551,696.69 29th March SOURABH 330764 500,000 2,051,696.69 29th March SOURABH 330766 2,000,000 51,696.69 30th March TRF FM GALACHITA 27,500,000 27,551,696.69 INVEST 30th March TRF TO GK RATHI 330772 21,000,000 6,551,696.69 30th March TRF TO SASHAK NBLE 330771 6,500,000 51,696.69 MET 30th March TRF FM GALACIATA INES 27,500,000 27,551,696.69 30th March TRF TO SABARA IMPEX 330773 27,500,000 51,696.69 30th March TRF FM GALACIATA INES 27500000 (XI) 27,551,696.69 30th March TRF TO SABARA IMPEX 330774 19,125,000( 8,426,696.69 XI) 30th March TRF TO GK RATHI 330775 8,375,000(XI 51,696.69 ) 30th March TRF FM GALACTICA 27,500,000 27,551,696.69 30th March TRF TO VIPLAV TRADING 330776 27,500,000 51,696.69 30th March TRF FM MOUNTBLANC 27,500,000(X 27,551,696.69
2) 30th March TRF FM MOUNTBLANC 10,375,000(X 37,926,696.69
2) 30th March TRF TO VIPLAV TRADING 330777 12,500,000( 25,426,696.69 X2) 30th March TRF TO GK RATHI 330778 25,375,000(x 51,696.69
2) 30th March TRF FM MATTERHORN 10,375,000 10,426,696.69 30th March TRF TO MOUNTBLANC 27,500,000 37,926,696.69 30th March TRF TO KLLCK NIXON 330779 37,87,5000 51,696.69 30th March TRF FM FIRCREST 10,375,000 10,426,696.69 INVEST 30th March TRF FM MOUNTBLANC 27,500,000 37,926,696.69 30th March TRF TO KILLICK NIXON 330780 37,875,000 51,696.69 30th March TRF FM MOUNTBLANC 27,500,000(X 27,551,696.69
3) 30th March TRF FM GALACTIICA 10,375,000(X 37,926,696.69
3) 30th March TRF TO GK RATHI 330781 17,500,000( 20,426,696.69 X3) 30th March TRF TO KILLICK NIXON 330782 17,875,000(x 2,551,696.69
3) 30th March TRF FM GK AK RATHI 46,000,000 48,551,696.69 30th March TRFTO SNOWCEM INDIA 330784 46,000,000 2,551,696.69 30th March TRF TO SUBAHU 46,000,000 48,551,696.69 30th March TRF TO SNOWCEM INDIA 330785 46,000,000 2,551,696.69 30th March TRF TO SUBAHU 39,000,000 8,451,696.69 30th March TRF TO KILLICK NIXON 330791 3,400,000 5,051,696.69 30th March TRF TO GEEKAY EXIM 330792 2,500,000 2,551,696.69 30th March TRF FRM CONCEPT 2,500,000 5,051,696.69 COMM 30th March TRF TO STALLION 330795 2,500,000 2,551,696.69 10 ITA No.746 & 883/M/08 M/s. Killick Nixon l:td.
INVEST
30th March TRF FM CONCEPT 2,500,000 5,051,696.69
COMMU
30th March TRF TO STALLLION 330794 2,500,000 2,551,696.69
INVET
30th March TRF FM CONCEPT 2,500,000 5,051,696.69
COMMU
30th March TRF TO STALLLION 300796 2,500,000 2,551,696.69
INVET
30th March TRF FM CONCEPT 2,500,000 5,051,696.69
COMMU
30th March TRF TO STALLLION 300793 2,500,000 2,551,696.69
INVET
30th March TRF TO KILLICK NIXON 5,000,000 7,551,696.69
30th March TRF TO GEEKAY EXIM 330787 5,000,000 2,551,696.69
30th March TRF FM GK RATHI 23,000,000 25,551,696.69
30th March TRF TO SNOWCEM INDIA 330786 18,000,000 7,551,696.69
30th March TRF FM GK AK RATHI 20,000,000 27,551,696.69
30th March TRF TO KILLICK NIXON 330797 20,000,000 7,551,696.69
30th March KOPSHA 330783 2,500,000 5,051,696.69
30th March 0220357/BILL NO.10032 68 5,051,628.69
30th March DD REALISED 100,000, 5,151,626.69
31st March KILLICK 330798 5,00,000 151,628.69
31st March LF CHARGES 400 151,628.69
9. On the basis of the above bank account it was concluded by the Assessing Officer at para 5.19 as under:
" From the above it is clear that every day the money which was invested by Killick Nixon Ltd. went to the following as below:
(1) On 28th March 11 crores invested by Killick Nixon Ltd. went to GK Rathi and Subahu Investments Ltd., R. 5.5 crores each through Kosha Investments Ltd., (2) On 29th March 11 crores invested by Killick Nixon Ltd., went to Subahu Investments Ltd. through Kosha Investments Ltd., (3) On 30th March 7.12 crores went to GK Rathi (HUF), 4 crores to Viplav Trading Ltd., 4.66 went to Sabara Impex, 0.65 crores to Shashank Noble Metals Pvt. Ltd. through M/s. Kosha Investments Ltd."
10. Ultimately, it was found that in fact no actual substantial cash was involved and it was merely a case of entries which were routed through receipt of cash from GK Rathi and others which was invested in four subsidiary companies i.e. Matterhorn Invetments Ltd., Fircrest Investments Ltd., Galatica Investments Ltd. and Montlblanc Investments Ltd. These four companies in turn invested the money in Kosha Investments which either directly or through other entities routed the money back to 11 ITA No.746 & 883/M/08 M/s. Killick Nixon l:td.
GK Rathi Group and Group companies. The flow chart has been made by the AO which reads as under:
GKAK Rathi (HUF)------ ----- Killick Nixon Ltd. ------- ------Matterhorn Investments Ltd.
I I ^ I
I------------------------------------------------------------------ Kosha Invetment Ltd.
Subahu Investmets Ltd.---------------- -------------------------------------------Killick Nixon Ltd.
I I
^ I
I I
Kosha Investments Ltd. ---------------------------------------------- Matterhorn Investments Ltd.
From the above it is clear that funds on 28th march were just a mere routing from two bank accounts of GKAK Rathi (HUF) and Subahu Investments Ltd. Thus, there was no fund flow, only cheques of receipts and payments were put on same day squaring up all the entries, so there was in fact no fund flow and Rs.11 crores investment on this day was just there on the face of it through mere movement of cheques without any ac5tual funds available with any of these parties involved."
11. The same pattern has been followed on all the 3 days. Only the names of the company got changed. It was also found that other companies like M/s. Viplav Trading , Subahu Investments Ltd., Sabara Impex Ltd., Shashank Noble Metal Ltd., were roped in to transfer the money to obtain from Kosha Investment Ltd., to GK Rathi group.
12. Even the receipts from GK Rathi (HUF) was doubted and it was observed by the AO in paras 5.34 and 5.35 which read as under:
"The assessee has shown that the amounts for investment made has been received from GKAK Rathi HUF, as a lona/advance given to the party as on 01.04.1999 was Rs. 39,76,83,593/-. The above is also created in the books of Killick Nixon Ltd., by journal entry, as explained below:
"In the F.Y,1997-98 the opening balance was Rs. 1,50,000/- only in the account of GKAK Rathi (HUF) and thereby passing journal entry on 31.03.1998, a closing balance of Rs. 17,82,07,874/- was created as on 31.03.1998. Further, in the year 1998-99, the journal entry as on 31.03.1999 was passed of Rs. 23,69,43,162/- and with minor adjustment, a closing balance of Rs. 39,76,03,393.67 was arrived at. In these accounts there has been no physical movement of funds, cumulative for both the previous two years i.e. 1997-98 & 1998-99 of more than Rs. 1 crore. Thus, it can be said that these were journal 12 ITA No.746 & 883/M/08 M/s. Killick Nixon l:td.
entries passed to show a heavy balance sheet by creating asset with equal liabilities in the balance sheet, with no movement of funds. Thus, the loan/advance to GKAK Rathi HUF as on 01.04.1999 was a sham advance given by the assessee without any fund involvement and the receipts from this party is therefore treated to be of the same nature.
Thus the assessee created an investment of Rs.48 crores without investing a single penny and by merely rotating cheques in more than 10 different accounts. The activity always got completed on the same day otherwise it would have created an imbalance in bank accounts and then it would have required some funds but as no funds were there due care was taken to square off the transaction on the same day. The activity can be described as each party involved in these circular transaction depositing a cheque of receipt and another one of payment of equivalent amount so that their account nullifies on the same day.
The above clearly implies that the assessee has created an investment of Rs.48 crores using bogus transfer and therefore, the investment in the share of four companies and subsequent transactions is treated as a sham transaction and thus the investment is not treated as eligible for any deduction or as cost for computing any capital gains."
13. The A.O. then went on to the analysis of the valuation of shares in the subsidiary companies where the investments were made and such valuation was analysed on Net Asset Value basis as well as Earning Capacity basis in para 6 of the assessment order and reached the conclusion that value of shares in these companies was less than Rs.25 per share then why investment was at a premium of Rs. 140 to 150 per share. To a query why such heavy price was made from the assessee vide letter dated 19.03.2004, the assessee replied as under:
"During the financial year ended 31.03.2000 i.e. previous year, we invested in the shares of the following companies on the long term basis as follows:
Sr. Date of Company's Name Nos. Amount (Rs.)
No. purchase
1. 25.11.99 Killick Halco Ltd. 78,000 1,550,000
2. 28.03.00 Matterhorn Investment Ltd. 800,000 120,000,000
3. 28.03.00 Firerest Investments Ltd. 800,000 120,000,000
4. 28.03.00 Galactica Invstments Ltd. 800,000 120,000,000
5. 28.03.00 Montblaanc Investments Ltd. 800,000 120,000,000
6. 31.03.00 Killick Halco Ltd., 50,000 40,000,000
7. 28.06.99 Associated Cement Co. Ltd. 90 4,950
8. 28.10.99 Janata Sahakari Bank Ltd. 10 1,000
521,555,950
13 ITA No.746 & 883/M/08
M/s. Killick Nixon l:td.
As on 31.03.99, we invested the amount of Rs. 78,840,624/- in various companies Equity shares, preference shares and other Government Securities. During the year ended we further invested Rs.52,15,55,950/- in various companies Equity Shares, the details of same are given above. T the end of financial year ended 31.03.2000, we invested in various securities totaling R.600,395,574. The Board of Directors of the company had invested in various securities at price, which they considered as a fair price after considering various business factors, profitability, growth, other business considerations etc. The Reason or investment a premium of the Investment companies.
M/s. Killick Nixon Limited were already holding 1,50,000 Equity Shares of the following companies.
1. Matterhorn Investment Ltd.
2. Ficrest Investment Ltd.
3. Galactica Investments Ltd.
4. Montblanc Investments Ltd.
During the year ended 31.03.2000, the company had further invested in the above companies at a premium of Rs. 150/- per share. The Board of Directors decided and restructured the above four companies to strengthen the finances of companies. The company were hopeful to revive the company's prospects in the business. Therefore, company has invested at a premium, as all of them were 100% subsidiaries of Killick Nixon Limited."
14. The Assessing Officer after analyzing the above reply was of the view that it is only a self-serving reply and no justification was there in the investment. AO also analysed the profits/loss history of Kosha Investment Ltd. wherein the four subsidiary companies, namely - Matterhorn Investment Ltd., Ficrest Investment Ltd., Galactica Investments Ltd., and Montblanc Investments Ltd. have made investments which reads as under:
S.No. Asst.Year Book Profit (Rs.) Share capital (Rs.)
1. 1996-97 2,520,638 9,000,000
2. 1997-98 - 13,122,926 9,000,000
3. 1998-99 - 41,765,143 9,000,000
4. 1999-00 - 28,848,980 9,000,000
5. 2000-01 - 76,902,385 18,360,000
15. From the above the Assessing Officer noted that the above company was merely a front company. The above company was a NBFC and showing only non- 14 ITA No.746 & 883/M/08
M/s. Killick Nixon l:td.
investment bearing advances and interest from NBFC, activity was less than Rs. 2 lakhs which makes it clear that it was merely a front company. In any case, investment by the four subsidiary companies - . Matterhorn Investment Ltd., Ficrest Investment Ltd., Galactica Investments Ltd., and Montblanc Investments Ltd in this company was only to siphon out the money and otherwise had no justification.
16. The Assessing Officer further investigated the sale of shares in these subsidiary companies to M/s. Shree Radha Financial Services Pvt. Ltd. Questions were asked from Shri G.R. Vora, Director of the four investment companies regarding sales also. From the statement, it was concluded that no evidence regarding sale of shares , even the transfer form etc. were not produced. Even the statement of Shri Devi Prasad Budhiya, who represented to Shree Radha Financial Services Pvt. Ltd. was also recorded. From his statement it emerged that the purchase of these shares by M/s. Diplomat Trading Pvt. Ltd. was financed by M/s. Killick Nixon Ltd. i.e. the assessee company itself through Shree Rdha Financial Services P. Ltd.
17. From the above, the Assessing Officer concluded that the whole transaction of purchase of shares in four subsidiary companies which, in turn, invested the money in Kosha Investments Ltd., from where the money went into Shri G.K. Rathi Group and others and shares of four subsidiary companies were sold to Shree Radha Financial Services Pvt. Ltd. and M/s. Diplomat Trading Pvt. Ltd., which in turn were financed by the assessee company itself was sham. He concluded that no real transfer or money took place and these were only paper transactions just to create short term capital losses in the hands of the assessee company.
18. The assessee company had also claimed losses from the sale of transaction of shares of M/s. Killick Halco Ltd., (KHL). The assessee company had converted its loan of Rs. 4 crores into shares as on 31st March, 2000 at the price of Rs. 800 oper share (including premium of 700/-). It was noticed that 'KHL' was a loss making company as per the table below:
15 ITA No.746 & 883/M/08
M/s. Killick Nixon l:td.
KILICK HALCO LTD:
Asst.Year Turnover Book profit Profit as per Income- Debit Balance tax (accrued) in P&L account 1996-97 8,900,219 953,472 NIL NIL 1997-98 255,478,636 -2,144,590 - 2,115,984 542,641 1998-99 30,158,210 -3,135,222 -2,342,205 3,619,332 1999-00 11,105,058 -9,625,462 -28,681,050 13,225,794 2000-01 9,583,639 -9,304,145 -4,632,900 22,539,939
19. It was further found that 'KHL' gave VRS to 86 employees on 16th July, 1998 by paying them a sum of Rs.2.26 crores which showed that 'KHL' was trying to close its operations. It was also noted that the assessee-company had earlier purchased shares of 'KHL' at a price of Rs. 19.87 and therefore there was no logic for purchase of further 50,000 shares at a premium of Rs.700/-. It was also noticed that in the assessment year 2001-02 'KHL' transferred all its activities to the assessee company. No effort was made at any point to revive this company. The Assessing Officer was of the view that since assessee was aware of the forthcoming capital gains and therefore, again artificial loss was created through just converting the loan of 'KHL' into shares at a huge premium. On enquiry it was explained as under:
"(a) During the financial year ended 31.03.2000, we purchased 78,0000 Equity shares at Rs. 19.87 per share. Further 50,000 Equity shares were acquired at the rate of Rs.800/- per share. The position of Equity Shares holding were as follows:
No. of Equity Shares Before 31.03.2000 2,22,000 Acquired in the F.Y.1999-2000 @ Rs.19.87 per share 78,000
------------
3,00,000 ====== After acquiring 3,00,000 equity Shares of Killick Halco Ltd., it became 100% subsidiary of M/s. Killick Nixon Ltd., Killick Halco Ltd., were specialized in the manufacturing of following goods:
1. Water well Drilling Rigs
2. Blast Hole Drilling Machines for Quarry work/open Cast Mines such as Lime Stone & Coal Mines.16 ITA No.746 & 883/M/08
M/s. Killick Nixon l:td.
3. Down the hole hammers viz. Valveless Mach-44 and Mach-66 Killick Halco Ltd., were making losses. But after considering its specialization of the above goods and moveable and immovable property, the Management of Killick Nixon Ltd., decided and restructured the finance of Killick Halco Ltd. Therefore, Killick Nixon Ltd., has acquired the balance 50,000 Equity Shares at the rate of Rs.800/- per share after verifying the future growth and revival of Company's fortune in the near future. As the management was confident in revival of company at tht time, it acquired all equity shares of Killick Halco Limited."
20. Assessing Officer noticed that on 25.11.1999 assessee acquired 78,000 shares at Rs. 19.87 per share and on 3.3.2000 the shares were acquired at Rs. 800/- including the premium of Rs.700/- per share. There was no change in the circumstances between these two dates and therefore, premium itself was not justified while investigating the sale of these shares, it was noticed that shares were sold to Snowcem India Ltd. In this background, the Assessing Officer doubted the whole transaction and disallowed the short-term capital loss and rather recomputed the sale and purchase price vide para 9.2 of his order, which reads as under:
"The genuine value of the share thus is treated as Rs.19.87 per share and the balance of Rs.780.13 per share is treated as a sham investment and so far the capital gain is calculated at a cost of 19.87 per share. This is also done keeping in mind that the shares have been transferred to Snowcem India Ltd., a group company under the same management who have also squared upon their loans as sale consideration of these shares. The Short Term Capital Gain is recomputed as under:
1,28,000 shares sold at Rs.83 per share Rs.1,06,24,000 Less: Cost of acquisition 1,28,000 at Rs.19.87 per share Rs. 25,43,360
-------------------
Rs. 80,80,640 ========== The same is considered as Short Term Capital Gain for the relevant year."
21. Assessee had also claimed long term capital loss amounting to Rs.1,68,37,861/- on sale of shares of Pelican Paints Ltd. During the assessment proceedings the Assessing Officer noticed that assessee had sold 42,500 shares of Pelican Paints Ltd. at Rs. 10 per share. The same were acquired at the following price.
17 ITA No.746 & 883/M/08
M/s. Killick Nixon l:td.
F.Y. Price/share (Rs.) No. of shares Price (Rs.) 1998-1999 580 2250 1,305,000 1999-2000 375 40,250 15,093,750
The Assessing officer raised a query why the value of the land and buildings at Aurangabad belonging to Pelican Paints Ltd. was not considered while selling the shares. It was pointed out that since the land was leasehold land, the same was not considered and the buildings were very old. In fact the following reply was given:
"Note on Pelican Paints Ltd. The share of M/s. Pelican Paints Ltd. has been valued as per average of valuation as per Net Value and Price earning value basis. Since the company has made losses in the last two years, the value as per PECV basis is taken at NIL. The land is leasehold land from MIDC. Further the building is very old at its WDV as Rs. 5,46,761/-. Therefore the fair value of shares at NIL is proper"
The Assessing Officer after considering these submissions observed as under:
"The assessee company while arriving at a fair market value has not taken into account the market value of land & building (which was incidentally done for Killick Halco Ltd.). they have transferred the same at a nominal price of Rs. 10 per share.
The perusal of balance sheet & P&L account of Pelican Paints Ltd. as on 31.03.2000 & 31.03.1999, 31.03.1998 shows:
(Rupees in lakhs) 1999-2000 1998-1999 1997-1998 Sales 28.17 35.14 28.96 Profit for the year 10.75 0.67 15.26 The note to accounts as on 31.03.1998, 31.03.1999 & 31.03.2000 states that the court has by an ad-interim order dated 1st July, 997 appointed a court receiver and restrained the company from in any manner disposing of alienating, encumbering, or parting with the possession and/or creating third party rights, titles and interest in the property, goods, book debits, movable and other assets. Despite of these facts the assessee Killick Nixon Ltd., has still invested in the shares at premium in the year 1998-99, 1999-2000 and thus can be stated to be nothing but a sham investment as 18 ITA No.746 & 883/M/08 M/s. Killick Nixon l:td.
also evident from the activity in the company in the past three years. The shares have been further sold to a company under the same management, i.e. Snowcem India ltd., for a sum of Rs. 4,25,000/-(i.e. at the rate of Rs.10/- per share) and there by not losing effective control in the company. The sale amount was settled by current account adjustments with assessee, therefore the sale is also treated as a sham sale which is self serving and to book losses to set off capital gain on account of sale of land. Therefore, the loss claimed on account of sale of shares of Pelican Paint is disallowed to be set off against any gain for the relevant year."
22. The Assessing Officer further recorded the statement of Shri T.B. Ruia who is the Director of the assessee-company. On the basis of the above investigations and enquiries the following conclusions were reached by the AO:
"10.5.1 Mr. T.B. Ruia has agreed completely with the statement of Mr. G.R. Vora barring the name of the transferee of shares which clearly implies the investment companies were used as a vehicle for investment in Kosha Investment Ltd., and the investment in shares was the planning of the assessee to be used for further benefits. Mr. Ruia gave the theory of valuation of shares at premium giving self serving hypothetical increase in value of Shivrajpur syndicate but could not justify the fact of investment at premium in these four investment companies, as the assessee even prior and after investment they were holding 1005 shares of the company. So the investment in share at premium in a 1005 subsidiary on account of the above is an absurd reason. Though of no relevance to this case but the diminishing of value of Shivrajpur Syndicate on account of certain demand in a year time is also a creation of the director and without any evidence, to the same and anyway as the money went to Kosha Investment Ltd., and had nothing to do with Shivrajpur Syndicate, this is a divergent reason given by the assessee and is therefore needs to be rejected and is done accordingly.
10.5.2) Further the assessee has stated it wanted to guard its marketing agency rights of Snowcem India Ltd., is a lame excuse as the assessee has been marketing goods of Snowcem India Ltd., for a large number of years and the management of Killick Nixon Ltd., and Snowcem India Ltd., per se is the same and so no way there can be a threat to the assessee regarding its losing of marketing rights.
10.5.3) Mr. T.B. Ruia has denied the statement given by Mr. Budhiya and stated that the transaction was bonafide. There are no merits in the arguments of Mr.T.B.Ruia. If the transactions were bonafide then why would Mr.Budhiya deny the same and say the facts of the transaction. Mr. T.B. Ruia could not justify the finance given to Shree Radha Financial Services Pvt. Ltd., from Killick Nixon Ltd., and Kosha Investment Ltd., and gave a lame excuse that he knew the person for long and also if it would have been a loan an interest amount would have been changed and Mr. Budhiya has clearly 19 ITA No.746 & 883/M/08 M/s. Killick Nixon l:td.
highlighted the movement of funds, which are only self serving in nature for the assessee and Mr. T.B. Ruia could not justify the same.
10.5.4) Statement of Smt. Pratibha Dangi:- Mr. Ruia has admitted that he knew Mr. Mogra. The Mogra family has received various amounts from M/s. Kosha Investment Ltd., in the relevant year and past year as interest free advance/consultancy charges. The assessee company proximity with Ruia family and Mrs. Dangi admission that funding was done by Killick Nixon Lt.d, for purchase of shares of investment company could not be dis-proved by Mr. T.B. Ruia but for his verbal denial of the whole affair.
10.5.5) Valuation of shares & Investment at Premium:
The assessee in its submission have justified the sale of shares by giving valuation methods like Net Asset Value and Price Earning Method but when put forward in front of the assessee that why the same should not be taken while taking into account the investment. Mr. Ruia could not give any satisfactory answer. Mr. T.B. Ruia has also stated that Snowcem India Ltd., has been a major revenue earner and Kosha Investment Ltd., was holding major shares of the company. The assessee company and Snowcem India Ltd., has same management for at least more than a decade and indirectly holds a large number of shares in Kosha Investment Ltd. So the assessee's justification given is false and incorrect and also Mr. Ruia has not given any documentary evidence that the threat of losing marketing rights was there from any quarter.
10.5.6) The assessee company surrendering rights of Snowcem India Ltd., in the later year was more because of the liabilities arising in the assessee company because of its involvement with Securities Scam and special Court Proceedings, whereas snowcem India Ltd., is devoid of any legal problem. So surrendering of marketing rights in the later years was the concentration of revenue in a legally problem free company which was decided by the same management.
10.5.7) Investment in Killick Halco Ltd. The assessee could not give any reasonable/sound basis for its investment at premium in Killick Halco Ltd., and the price differential of investment at Rs. 19.87 & Rs.800 in a short gap of four months. The assessee's main intention can be safely described as the booking of loss by this transaction and transferring to the company with the same management and as Mr. T.B. Ruia is the Managing director of both the companies. Thus, it can be sent hat by transferring shares to Snowcem India Ltd. The group has not lost control in the company as it was not sold to any outsider. Thus, the transfer and investment can only be seen as a vehicle for booking losses and therefore has been rejected accordingly.
10.5.8) ROTATION OF CHEQUES IN VARIOUS ACCOUNTS OF GLOBAL TRUST BANK: The director was shown the accounts and he just stated that the transaction was through bank but could not justify further, in view of that it is presumed that assessee has no bonafide reason to justify the sham investment.
10.5.9) the assessee company has not replied anything further in this regard as in the light of the bank statement and statements u/s.131 of various 20 ITA No.746 & 883/M/08 M/s. Killick Nixon l:td.
parties involve din the share transaction so, it is concluded that the assessee has nothing further to say in the above matter.
10.5.10) CONCLUSION ON INVESTMENT:
So, to sum up:
i) The investments as well as ale of share in the four companies namely Matterhorn Invesments Ltd., Fircrest Investments Ltd.,. Galatica Investments Ltd., Montblanc Investments Ltd., are treated as sham, so the loss on them is disallowed accordingly.
ii) The sale of shares of Pelican Paints is treated as sham, the transfer of shares is self serving to create loss, so the loss is disallowed accordingly.
iii) The fresh investment in shares of Killick Halco Ltd., at Rs.800/- per share is treated as sham, so the bonafide investment is treated at Rs.19.87 per share and short term capital gain is worked out as in para 9.2.
iv) The value of land is taken, subject to valuation report to be received by this office from the relevant District Valuation Officer as the matter has been referred u/s.55A.
23. Before the learned CIT(A) mainly legal submissions were made consisting of that Assessing Officer was required only to see whether the assessee company was the owner of the shares and whether the same were transferred and what was the value of consideration and cost of acquisition and accordingly AO was required to compute the capital gains or capital loss. It was also pointed out that assessee had taken various steps as per the law, for example shares were purchased after being approved by the Board of Directors. Shares were allotted to the assessee company, Return under the Companies Act were filed with the Registrar of Companies as per Company Law, all the transactions regarding payment and receipts were made through bank account, and therefore, such loss could not have been disallowed. The learned CIT(A) adjudicated this issue vide para 4.10, 4.10.1 to 4.10.4 which are as under:
"I have carefully considered the facts of the case both as per the impugned assessment order and the submissions made by the appellant's AR. As far s the short term capital loss on sale of shares of the four companies namely, Matterhorn Investments Ltd., Fircrest Investments Ltd., Galatica Investments Ltd., and Montblanc Investments Ltd., is concerned, I am in total agreement with the A.O. that there were no real transactions of purchase and sale of shares 21 ITA No.746 & 883/M/08 M/s. Killick Nixon l:td.
resulting into any capital loss to the appellant company. The manner of buying these shares at a premium of Rs. 140/- per share within a short period of three days and the manner in which new accounts were opened in global Trust Bank Ltd., for routing the cheques movement leaves no doubt about the non-genuineness of the said purchase and sale of shares. The A.O. has convincingly proved that the shares of these four companies did not deserve, on sound economic reasons, to be purchased at a cost which the appellant company has allegedly paid and I am in agreement with the A.O. that the appellant had indulged into these transactions merely for the purpose of incurring short term capital loss with an intention to set it off against the capital gain on transfer of its land to Vysya Bank Ltd., The statement of Shri G.R. Vora nominated Director of these four companies as recorded by the A.O., confirms that there was no business activity in these companies which could justify the payment of Rs. 150/- per share. The same statement of Shri G.R. Vora further confirms that all the decisions regarding investment in these four companies and further investment in the other group company M/s. Kosha Investments Ltd. were taken by the management of the appellant company which included Shri T.B. Ruia and Shri B.R.Ruia. For the reasons discussed in para 5 of the impugned assessment order, it is clear that the appellant's alleged share transactions in these four companies were not genuine in so far as there was no actual movement of funds but a mere accounts entries of circular nature in the bank accounts of G.K.A.K.Rathi (HUF), appellant company, Kosha Investments Ltd. and the investment companies of Rathi Group. These transactions have been rightly held to be sham transaction by the A.O. due to the reasons discussed at length in para 5 of the impugned assessment order. In para 6 of the assessment order, the A.O. has discussed the bonafides of appellant's investments in these four companies and proved that the intrinsic value of each share of these companies was not more than its face value and there was no reason for the appellant to have allegedly paid Rs. 150/-. The same shares were allegedly sold by the appellant company at rate of Rs.5/- per share in February 2001 and no significant business activity took place in the intervening period to justify as to why a share of Rs. 150/- was sold for Rs. 5/- if not for enabling the appellant company to claim short term capital loss. Considering all these factors and also those discussed at length in the impugned assessment order by the A.O. I hold that the alleged short term capital loss of Rs. 46.4 crores and long term capital loss of Rs.92,41,224/- allegedly suffered by the appellant in respect of the purchase and sale of shares of these four companies is not a genuine loss and the A.O. was justified in treating it as sham. The action of the A.O. in rejecting such losses and not allowing the same to be set off against the long term capital gain on transfer of appellant's land to Vysya Bank Ltd., is upheld.
Similarly, the appellant's investment in 50,000 shares of its group company M/s. Killick Halco Ltd. @Rs.800/- per share by converting its loan of Rs. 4 crore into share investment is also to be treated as a sham transaction for the reasons discussed in para 7 of the impugned assessment order. The said loan was practically irrecoverable as Killick Halco Ltd. did not have any liquidity to repay the loan. The appellant bought the share of this company at a premium of Rs. 700/- which appears to be a pre-arranged price as the shares of the same company 22 ITA No.746 & 883/M/08 M/s. Killick Nixon l:td.
had been bought at the rate of Rs. 19.87 per share only four months before and no significant business activity took place in that company during intervening period to justify such a high price. I am therefore of the opinion that the A.O. has rightly adopted this price at Rs. 19.87 in place of Rs. 800/- per share. Accordingly, for the reasons discussed in para 7 of the impugned assessment order by the A.O). with whom I am in agreement, the disallowance of short term capital loss of Rs. 3,09,26,000/- on the sale of shares of kellick Halco Ltd. is upheld and for the same reasons the taxation of short term capital gain of Rs. 80,80,640/- on the sale of same shares is confirmed.
As far as the disallowance of appellant's claim regarding long term capital loss of Rs.1,68,37,861/- in respect of sale of shares of M/s. Pelican Paints Ltd., is concerned, I am in agreement with the A.O. that the appellant's sale of these shares to its group company M/s. Snowcem India Ltd., at the rate of Rs. 10/- per share can not be treated as a genuine transaction. For the reasons discussed in para 9 of the impugned assessment order, I hold that the appellant has allegedly transferred these 42,500 shares to M/s. Snowcem India Ltd., only for the purpose of booking a long term capital loss for being set off against the long term capital gain in respect of its land transferred to Vysya Bank Ltd. In the said transaction of transferring 42,500 shares of M/s. Pelican Paints Ltd., the appellant has not lost effective control in the company as these shares have been transferred only to its group company. Hence I uphold the action of the A.O. in treating this transaction as a sham one and not allowing the alleged long term capital loss to be set off against the long term capital gain pertaining to the land transferred to Vysya bank Ltd.
In para 8 of the impugned assessment order, the A.O. has discussed at length all the facts which prove that the appellant had entered into the above referred share transaction with the sole intention of creating artificial short term and long term losses for the purpose of setting off the same against the long term capital gain on transfer of its land to Vysya Bank Ltd. In this regard the A.O. has recorded the statement of Shri Deviprsad Budhiya, Director of Shri Radha Financial Services Ltd. to whom the shares of above referred four companies (Matterhorn Invetments Ltd., Fircrest Investments Ltd., Galatica Investmnts Ltd. and Montlblanc Investments Ltd) were allegedly sold. The statement of Shri Budhiya clearly proves that the funds for investment in these shares originated from and return back to the appellant company regarding the share transactions made with Shri Radha Financial Services Ltd. The statement of Smt. Pratibha J. Dangi recorded u/s.131 by the A./O. on 16.3.2004 further confirms this conclusion as drawn by the A.O. Moreover, the facts stated by Shri T.B Ruia, Managing Director of the appellant company, in this statement recorded by the A.O. u/s.131 of the I/T.Act, 1961, finally makes it clear that the appellant's alleged share transactions resulting into short/long term capital loss were sham transactions and merely stage managed by its management. Shri T.B. Ruia is the Chairman cum Managing Director of the appellant company and the main person in the appellant's group of concerns. While recording his statement u/s. 131 of I.T.Act 1961, the A.O. offered an opportunity to him for cross examining Shri Deviprasad Budhiya and Smt. Pratibha J. Dangi but he evaded the same by saying that Shri 23 ITA No.746 & 883/M/08 M/s. Killick Nixon l:td.
Budhiya is telling lies and "there is no point in cross examining a person who is telling a lie". In para 10.5 of the impugned assessment order, the A.O. has analysed the facts as emerging from the statement of Shri T.B. Ruia and I am in total agreement with the A.O. as far as the conclusions in this regard have been drawn by him.
In the written submissions made by the appellant's AR during the course of present appellate proceedings, only the routine aspects such as the execution of share-transfer deeds and payments through banking channels have been emphasized but the same are relevant only if the transactions are bonafide. In the case of the appellant company, it has been convincingly proved by the A.O. that these share transactions were made only for the purpose of booking bogus losses and with the ulterior motive of setting them off against the appellant's otherwise taxable long term capital gain on transfer of its land to Vysya Bank Ltd. Hence, no importance can be attached to the facts of such share transfer deeds and payments through banking channels as the appellant's transactions are malafide and not bonafide. The A.O. has proved this aspect by irrefutable evidence. Accordingly, I uphold the action of the A.O. in disallowing the short term capital loss of R.s46.4 crores and long term capital loss of Rs. 92,41,224/- on the alleged sale of the shares of four companies (Matterhorn Invetments Ltd., Fircrest Investments Ltd., Galatica Investments Ltd. and Montblanc Investments Ltd.), taxing short term capital gain of Rs. 80,80,640/- instead of allowing short term capital loss of Rs. 3,09,26,000/- on sale of shares of M/s K9llick Halco Ltd. and disallowing long term capital loss of Rs. 1,68,37,861/- on sale of the shares of M/s. Pelican Paints Ltd., to conclude the first ground of appeal regarding the capital gain/loss on appellant's share transactions is dismissed and the action of the A.O. is upheld".
24. Before us the learned counsel for the assessee submitted that short-term and long term capital loss in Matterhorn Investments Ltd., Fircrest Investments Ltd., Galatica Investments Ltd. and Montblanc Investments Ltd. has been not allowed by the Assessing officer mainly on the reasoning that investment in these companies was a sham transaction. In the case of M/s. Pelican Paints Ltd., the A.O. has treated the sale of shares as sham transaction and in the case of Killick Halco Ltd., the loss has been denied because investment at the rate of Rs. 800 per share has been considered as sham transaction. He argued that basically for determination of capital gains/loss the provisions of section 45 to 55 of the Act have to be looked into. Further, it has not been denied that the assessee was the owner of the capital asset under section 2(14) of the Act, the same was transferred which comply with the definition of the transfer under section 2(47) of the Act. It has also not been denied that the assessee had 24 ITA No.746 & 883/M/08 M/s. Killick Nixon l:td.
received full consideration of the shares through banking channels. He also pointed out that shares in the four companies were acquired as per the Board resolution authorizing the Directors to subscribe shares at a premium, such shares were allotted by different companies, which is duly reflected in the annual accounts as well as the returns filed with the Registrar of Companies. He submitted that the transaction was held to be sham in four companies mainly because funds were borrowed but there is no ban or requirement under the law that investment in shares has to be made out of assess's own funds. According to him, the test of ownership of shares cannot be further subjected to the test of sources of investment. It was further argued that the A.O. has not reached the right conclusions while determining the value of shares because generally investments are made on the basis of future growth of the companies. Investment in all the four companies is duly evidenced by all the steps required to be taken which comply with various requirements of the Companies Act.
25. With reference to the objections regarding investment in 50,000 shares of M/s. Killick Halco Ltd., @ Rs.800/- per share, it was argued that the A.O. has no power to substitute the cost of acquisition which has to be determined in terms of section 48 read with section 55 of the Act. With reference to the sale of shares in the case of M/s. Pelican paints Ltd., which has also been doubted by the Assessing Officer it was submitted that such doubts are based on suspicion, conjectures and surmises because neither the fact of investment nor the fact of transfer of shares has been doubted. Once the shares were purchased at a premium and this fact was accepted by the A.O., then the price paid for acquisition of such shares was to be taken as cost of acquisition and jut because some of the Directors of the assessee company were common to M/s. Snowcem India Ltd., to whom the shares of M/s. Pelican Paints Ltd., were sold, it cannot be said that the sale transaction was sham.
26. Lastly, while referring to the observation of the A.O. in respect of sale of shares and doubts expressed in that regard it was submitted that the transfer is 25 ITA No.746 & 883/M/08 M/s. Killick Nixon l:td.
complete in the case of shares once the transfer deed is executed and all the subsequent acts by broker and the buyers are not relevant for determining the sale/transfer of shares. The fact of execution of transfer deed was not denied and the shares have been transferred by respective companies and the names of transferees appeared in the Register of Shareholders which is evidenced from the returns filed with the Registrar of Companies.
27. While concluding he submitted that all the legal steps as required by the law have been taken and therefore, capital loss arising on transfer of shares in various companies could not have been denied.
28. On the other hand, the learned Departmental Representative referred to various parts of the assessment order and submitted that the A.O. has clearly brought the case after analyzing the bank statements, the balance sheet of the subsidiary companies and other relevant factors that investment in the subsidiary companies at a premium and ultimately sale of the same was a sham transaction, which was conducted mainly to reduce the capital gains earned by the assessee. He strongly relied on the orders of the lower authorities.
29. We have considered the rival submissions carefully and have also perused the relevant material on record. As far as the short-term and long term capital loss on sale of four companies namely, Matterhorn Investments Ltd., Fircrest Investments Ltd., Galatica Investments Ltd. and Montlblanc Investments Ltd., are concerned, we agree with the reasoning given by the learned CIT(A) for disallowing the loss.
30. We would like to recall the decision of the Hon'ble Supreme Court in the case of Sumati Dayal v. CIT (1995) 214 ITR 801. In that case the appellant carried on business as a dealer in art pieces, antiques and curios in Bangalore. During the assessment year 19710-72, she claimed that she received a total amount of Rs. 3,11,831/- by way of race winnings in jackpots and treble events in races at turf club in Bangalore, Madras and Hyderabad. The said amount was shown by the appellant in 26 ITA No.746 & 883/M/08 M/s. Killick Nixon l:td.
the capital account in the books. For the assessment year 1972-73, she claimed receipts of Rs. 93,500 as race winnings in two jackpots at Bangalore and Madras and the said amount was credited in the capital account in the books. The Income-tax Officer included these amounts as income from other sources and assessed them. The Appellate Commissioner confirmed the order. The appellant referred the matter to the Settlement Commission. The Settlement Commission by a majority held that the explanation of the assessee was not genuine for the following reasons: (i) the appellant's knowledge of racing was very meager, (ii) A jackpot is a stake of five events in a single day and one can believe a regular and experienced punter clearing a jackpot occasionally but the claim of the appellant of having won a number of jackpots in three or four seasons not merely at one place but at three different centres, namely, Madras, Bangalore and Hyderabad appeared, prima facie, to be wild and contrary to statistical theories and experience of frequencies and probabilities (iii) The appellant's books did not show any drawings on race days or on the immediately preceding days for the purchase of jackpot combination tickets, which entailed sizable amounts varying generally between Rs.2,000 and Rs,3,000. The drawings recorded in the books could not be co-related to the various racing events at which the appellant made the alleged winnings; (iv) While the appellant's capital account was credited with the gross amount of race winnings, there were no debits either for expenses and purchases of tickets or for losses (v) In view of the exceptional luck claimed to have been enjoyed by the appellant, her loss of interest in races from 1972 assumed significance. The Settlement Commission took the view that winnings in racing became liable to income-tax from April 1, 1972, but one would not give up an activity yielding or likely to yield to large income merely because the income would suffer tax and that the position would be different, however, if the claim of winnings in races was false and what were passed off as such winnings really represented the appellant's taxable income from some undisclosed sources. 27 ITA No.746 & 883/M/08
M/s. Killick Nixon l:td.
31. On appeal, the Hon'ble Supreme Court held that dismissing the appeal, that the Settlement Commission after considering the surrounding circumstances and applying the test of human probabilities had rightly concluded that the appellant's claim about the amount being her winnings from races was not genuine.
32. Thus, the test of human probabilities was accepted by the Hon'ble Supreme Court. Documentary evidence was ignored and human probability test was applied. On this touchstone we analyze the findings of the lower authorities and replies given by the assessee.
33. Assessee had no funds to start with for making investments in four subsidiary companies and the money was borrowed from the following persons :
1 GKAK Rathi HUF 34.87 crores (28/3 to 30/3) 2 Subahu Investment Ltd. 5.50 crores (28/3)
3. Viplav Trading Ltd. 1.30 crores (30/3)
4. Kosha Investments 6.325 crores (29/3/00) (balances) 48.00 crores Now let us look at what is the material before the A.O. and how he dealt with the same.
34. It is very surprising that major chunk of money has come from GKAK Rathi HUF, who is the main person behind Geekay Exim (India) Ltd., on whose behalf the assessee company had given guarantee to Vysya Bank and ultimately lost a sum of Rs.105 crores. The dispute with Geekay Exim (India) Ltd., started in the year 1998-99 and ultimately the land was agreed to be transferred on 29th September, 1999 and still the same person who is causing the loss of Rs. 105 croes to the company is giving Rs. 34 crores. (Details have been discussed while adjudicating ground No. 3 in later paras of the order). This fact is beyond comprehension of any prudent person. We fail to understand that if the assessee company could take money from him for investment in its subsidiary companies, then why the company could not recover its dues. 28 ITA No.746 & 883/M/08
M/s. Killick Nixon l:td.
35. It is to be noted that investments in four subsidiary companies has been made in a span of three days at a huge premium of Rs. 140/- or Rs.150/- per share. It is further to be noted that all these companies were already 100% subsidiaries of the assessee company and if there was any advantage lying on those companies that is to say that if any gold mine was available with these companies it already belonged to the assessee company because of 100% shareholding. Assuming that if these companies requires further money then in the absence of any real assets where was the need for paying a huge premium. The reason given before the Assessing Officer was that investment was made to strengthen the finance of those four subsidiary companies. If that is so, we fail to understand then why within a period of three days the money invested by the assessee company has disappeared from the amounts of these four companies because these four subsidiary companies in turn have invested a sum of Rs. 48.15 crores in another company known as Kosha Investment Ltd.
36. The Assessing Officer made further enquiries from the investment of M/s. Kosha Investments Ltd., and found that in those three days the money has further disappeared from the accounts of M/s. Kosha Investments ltd. and has ultimately returned to the assessee company, M/s. Snowcem India Ltd., GKAK Rathi group, Subahu Investment Ltd., and Sabara Impex Pvt. Ltd. It is also to be noted that investment in Kosha Investment Ltd., by these four subsidiary companies was also made at a huge premium whereas Kosha Investments Ltd. had following losses:
S.No. Asst.Year Book Profit (Rs.) Share capital (Rs.)
1. 1996-97 2,520,638 9,000,000
2. 1997-98 - 13,122,926 9,000,000
3. 1998-99 - 41,765,143 9,000,000
4. 1999-00 - 28,848,980 9,000,000
5. 2000-01 - 76,902,385 18,360,000 Thus, the despite of losses in Kosha Investments Ltd., the assessee's four subsidiary companies choose to make investments at huge premium (nominal value of shares is 29 ITA No.746 & 883/M/08 M/s. Killick Nixon l:td.
Rs.22,50,000/- and premium is 11,91,25,000/- in each of the four companies) and no justification was given before the lower authorities or even before us.
37. The Assessing Officer has also again analysed date-wise transaction in various banks and ultimately found that no money at all in fact was involved and it was only circular transaction and for this he has drawn the following chart.:
GKAK Rathi (HUF)------ ----- Killick Nixon Ltd. ------- ------Matterhorn Investments Ltd.
I I ^ I
I------------------------------------------------------------------------ Kosha Invetment Ltd.
Subahu Investmets Ltd.---------------- -------------------------------------------Killick Nixon Ltd.
I I
^ I
I I
Kosha Investments Ltd. ---------------------------------------------- Matterhorn Investments Ltd.
The above flow chart clearly shows that assessee company i.e. M/s. Killick Nixon Ltd., mainly generated funds from GKAK Rathi (HUF), M/s. Subahu Investments Ltd. and M/s. Kosha investments Ltd. over a period of 3 days, on the same dates when this money was generated it was sent to four subsidiary companies, i.e. Matterhorn Investments Ltd., Fircrest Investments Ltd., Galatica Investments Ltd. and Montblanc Investments Ltd. by way of investment in their shares from where on the same 3 days the money went to M/s. Kosha Investments Ltd. again as investment in shares from where the money again went back to GKAK Rathi Group, M/s.Subahu Investments Ltd.
and M/s. Sabara Impex Ltd., and the last two companies belonged to GKAK Rati Group. Thus no real money was involved and it has been simply a case of entries starting from a particular place and ending at the almost the same place by employing maze of different companies.
38. Thus the submission before the Assessing Officer that investment was done to strengthen the finances of four companies is totally wrong because actually no money was ever invested at all in the sense that a cheque was obtained and circulated through various entities again and again. In any case money never remained with four 30 ITA No.746 & 883/M/08 M/s. Killick Nixon l:td.
subsidiary companies because the same was after the receipt was immediately handed over to Kosha Investments Ltd., which in turn went to other entities and this has been clearly demonstrated by the Assessing Officer from the bank statements of various companies reproduced in his assessment order. The Assessing Officer had also analysed the transactions regarding sales of shares of these four subsidiary companies and also recorded a statement of Shri G.R. Vora, Director in these four companies, Shri Devi Prasad Budhiya of Shree Radha Financial Services Pvt. Ltd. and concluded that execution of share transfer form was not produced before him. Even the funds for purchasing of shares by Shree Radha Financial Services Pvt. Ltd., and Diplomat Trading Pvt. Ltd., were indirectly financed by the company. The learned counsel for the assessee has not produced any material to show that this is not correct. In fact he has chosen not to say anything on this aspect. From all the above findings it becomes clear that assessee had merely generated paper loss through means of colourable devices which are still not permissible in view of the decision of the Hon'ble Supreme Court in the case of McDowell & Co. Ld. vs. CIT (154 ITR
148)(SC). Therefore, we find nothing wrong with the order of the CIT(A) in this respect and confirm the same.
39. The assessee had also claimed short term capital loss of Rs. 3,09,26,000/- on account of sale of shares of Killick Halco Ltd., which has been converted into short term capital gains of Rs.80,80,640/- by the Assessing Officer. The Assessing Officer noticed that assessee company held 2,22,000 equity shares in its subsidiary companies known as Killick Halco Ltd., in which further 78,000 shares were acquired at the rate of Rs.19.87 per share after which Killick Halco Ltd. became 100% subsidiary of the assessee company. Assessee had also amount of loan recoverable from this company amounting to Rs. 4 crores which was converted into share at the rate of Rs.800/-per share including premium of Rs. 700/-. The assessing Officer noticed that Profit & Loss position of Killick Halco Ltd. reads as under:
31 ITA No.746 & 883/M/08
M/s. Killick Nixon l:td.
Asst.Year Turnover Book profit Profit as per Income- Debit Balance
tax (accrued) in P&L account
1996-97 8,900,219 953,472 NIL NIL
1997-98 255,478,636 -2,144,590 - 2,115,984 542,641
1998-99 30,158,210 -3,135,222 -2,342,205 3,619,332
1999-00 11,105,058 -9,625,462 -28,681,050 13,225,794
2000-01 9,583,639 -9,304,145 -4,632,900 22,539,939
Moreover, in July, 1998 assessee gave VRS to 86 employees which shows that Killick Halco Ltd., was on the verge of closure. No reply was given before us why shares were purchased at a price of Rs. Rs.800/- per share in March 2000 when assessee itself has purchased another 78,000 shares at Rs. 19.87 per share on 25.11.1999. No substantial change in the intervening period is visible from records and the position of profit and loss clearly shows that Killick Halco Ltd., was a loss making company and further on the verge of closure. The only probability which seems to be there for making investment at a premium of Rs.700 each is that the assessee wanted to generate loss through sale of shares of that company. Therefore, this transaction also seems to the totally sham and we decline to interfere with the orders of the lower authorities.
40. One more loss on account of sale of shares in the case of Pelican paints Ltd., amounting to Rs. 1,68,37,861/- has been denied by the Assessing Officer. In this respect we find that the Assessing Officer clearly noticed that assessee had 42,500 shares in Pelican Paints Ltd. which was purchased in 1998-99 at Rs. 580 per share and in 1999-2000 at Rs. 370/- per share. The shares were sold to another sister concern M/s. Snowcem India Ltd., at the rate of Rs. 10 per share.
41. The Assessing Officer raised a query as to why while determining the value of shares no credit for leasehold land from MIDC was taken and further the building was also considered on its WDV because it is an old building. We further find the profit and loss position of the company which reads as under:
"The perusal of balance sheet & P&L account of Pelican Paints Ltd., as on 31.03.2000 & 31.03.1999, 31.03.1998 shows:32 ITA No.746 & 883/M/08
M/s. Killick Nixon l:td.
(Rupees in lakhs)
1999-2000 1998-1999 19997-1998
Sales 28.17 35.14 28.96
Profit for the year 10.75 0.67 15.26
The above clearly shows the company is highly profitable. The Assessing Officer had during the assessment proceedings noticed that a Court Receiver who was appointed and who had restrained the company from alienating any of the property despite of these facts the assessee choose to invest at huge premium and later on sold the shares at a loss. Further, while determining the sale value no credit has been taken by the assessee company for leasehold and building held by Pelican Paints Ltd., which is not correct. Before us no justification for purchasing the share at a premium and selling the shares at Rs. 10/- was given and, therefore, in this case also we are of the view that the whole transaction has been carried out only with a view to generate paper losses because the transaction was between sister concerns. In these circumstances, we confirm the order of the CIT(A) in respect of the issue raised in ground No.1.
42. As far as ground No. 2 is concerned, after hearing both the parties, we find that during the assessment proceedings the Assessing Officer noticed that assessee had claimed the fair market value of land as on 01.4.81 which was sold during the year at Rs.11.10 crores. Later on it was stated vide letter dated 25.11.2003 that fair market value of the land should be taken at Rs. 19,76,00,000/- as on 01.04.81 as per the Valuation report of one shri R.J. Sethna, A.O. noted that the said report was dated 18.3.92 surprisingly it had valued a part of land which was ultimately taken over by Vysya Bank and which was treated as sale by the assessee. The A.O. observed that the assessee had given the guarantee in the year 1997 then how that specified piece could be known in the year 1992 to the valuer and therefore the report was treated only a self-serving document.
33 ITA No.746 & 883/M/08
M/s. Killick Nixon l:td.
43. He also wondered that if this report was available with the assessee at the time of filing of this return then why the same was not filed along with the return. In this background, A.O. referred the matter to the valuation Officer u/s.55A and since some particulars were not filed by the assessee before the DVO the report was not sent to the A.O. In this background, the Assessing Officer adopted the fair market value of the land at Rs. 11.10 crores and made it subject to rectification u/s.154 when the report of valuation Officer would be available.
44. During the appeal proceedings, the Assessing Officer forwarded the report of the DVO vide his letter dated 30.9.2004 in which the valuation report dated 20.9.2004 was also sent wherein the fair market value of the land was valued at Rs.1,70,43,890/-. Because of this difference it became clear that capital gains computed by the Assessing Officer was required to be revised and accordingly, the CIT(A) issued notice under section 251(2) on 11.10.204 which was further replaced by another notice dated 25.10.2004 and proposed to enhance the assessee's income in respect of long term capital gains. This proposal was objected by the assessee by letter dated 18.10.2004. It was argued that since the AO has mentioned in his order that on receipt of valuation report, the order would be rectified under section 154 and, therefore, such rectification should have been made only by the AO. The learned CIT(A) rejected this argument by observing that the CIT(A)"s powers are co-terminus with that of AO and further he has been empowered to make enhancement specifically and, therefore, he was empowered to enhance the taxable capital gains accordingly.
45. It was further argued before the CIT(A) that valuation given by the Approved Valuer Shri R.J. Sethna should be adopted but the learned CIT(A) observed that no such report was filed before him and therefore, he did not take cognizance of this submission. In fact, the detailed observation made in paras 3.9.5 and 3.9.6 in the order of the CIT(A) read as under:
34 ITA No.746 & 883/M/08
M/s. Killick Nixon l:td.
"3.9.5 In the same letter, the appellant requested for adoption of the valuation report prepared by Shri R.J. Sethna, another government approved registered valuer, for the purpose of valuing appellant's land in question. However, the appellant has not submitted any copy of the valuation report of Shri R.J. Sethna for my consideration and hence I am unable to take cognizance of appellant's submission in this regard. In the same letter dated 18.10.2004, the appellant requested for being permitted to appoint another registered valuer under the provisions of section 287A of the I.T.Act, 1961 for making submissions with regard to the valuation of the impugned land. For this purpose the appellant was given an opportunity, vide my letter No. CIT(A)-C- 1/Misc/2004-05 dated 10.11.2004 to represent the matter through their registered valuer in terms of the provisions of section 287A of I.T. Act, 1961 and a hearing was fixed on 22.11.2004 in this regard. However, the appellant has so far not appointed any valuer for the purpose and there was no representation on its behalf on the appointed date of 22.11.2004. Hence I am left with no alternative but to adopt the fair market value of this land as on 1.4.1981 as fixed by the DVO.
3.9.6. The Assessing Officer is, therefore, directed to recompute the long term capital gain accrued to the appellant as a result of the transfer of impugned Chandivali land to Vysya Bank by adopted the cost of acquisition of the said land as on 1.4.1981 at Rs.1,70,43,890/- as foxed by the DVO. Hence, the additional ground of appeal in this regard stands dismissed and the appellant's income in respect of long term capital gain on transfer of its land is directed to be enhanced. The Assessing Officer is further directed to issue a notice of demand under the provisions of section 156 of the I.T.Act, 1961 in respect of the additional demand to be raised as a result of the revision of taxable long term capital gain as directed above. The A.O. is also directed to initiate penalty proceedings under section 271(1)(c) of I.T.Act, 1961 against the appellant for understanding its taxable long term capital gain on transfer of Chandivali land and for filing wrong particulars thereof in the return of income filed by it."
46. The assessee had also made a claim for a sum of Rs. 1 crore on account of compensation for redemption of sub-tenancy right. This claim was disallowed by the A.O.Vide para 11.3 on the basis that bonafide of the claim were not established and the amount was not paid during the year and there was no proof that this amount is really payable. Even three years after the agreement no payments have been made. The A.O. also noted that the land was given as a guarantee on account of Geekay Rathi Group which had defaulted and the land was ultimately taken over by the Bank and no prudent businessman would facilitate the vacation of illegal slum dwellers and incur further cost once he has already been duped.
35 ITA No.746 & 883/M/08
M/s. Killick Nixon l:td.
47. Before us the learned counsel for the assessee submitted that valuation report obtained from Shri R.J.Sethna was furnished to A.O. vide letter dated December 18, 2003 and copy of the same was filed before us. He submitted that once the valuation report of the registered valuer was available then the A.O. had no power to refer the matter again to the Valuation Officer in terms of Section 55A of the Act. In this regard he strongly relied on the following decisions:
i) Smt. Krishnabai Tingre v. ITO (101 ITD 317)
ii) Mrs.Rubab M. Kazeraniv. JCIT (2004) 9 ITD 429
iii) Urmila Bawa v. ACIT 16 ITCL (II) 186
iv) ITO v. Smt. Lalitaben B. Kapadia ( 3 DTR 28)
v) Sajjankumar M. Hatlaka v. JCIT (284 ITR 156)
He further argued that if the valuation report is not available before completion of assessment proceedings then such reference would become invalid. For this proposition he strongly relied on the decision of the Hon'ble Kolkata High Court in the case of Reliance Jute and Industries Ltd. v. ITO (150ITR 643). He pointed out that objections were raised before the DVO and were duly pointed out before the first appellate authority which have not been dealt with by the learned CIT(A). In this regard, he referred to pages 66 to 68 and page 79 of the paper book.
48. Lastly, while arguing on this ground he referred to page 36 of the assessment order and pointed out that the Assessing Officer has wrongly denied the claim of compensation for redemption of sub-tenancy right. He pointed out that certain people had occupied the land belonging to the assessee and since assessee was duty bound to give to the Bank the land free from all encumbrances and therefore, the assessee was required to throw out the people occupying the land for which provisions of Rs. 1 crore was made.
49. On the other hand, the learned Departmental Representative pointed out that the report from the Registered Valuer could not have been in existence on 18.3.1992 36 ITA No.746 & 883/M/08 M/s. Killick Nixon l:td.
because the Registered Valuer had valued the land which was given ultimately to the bank separately. Such guarantee was given in the year 1997 and the Registered Valuer could not have separated the unoccupied land in the year 1992 itself. He has also referred to various paras of assessment order and appellate order and strongly relied on them and concluded by saying that the valuation report has already been rightly rejected. In respect of compensation, he strongly relied on the orders of the lower authorities.
50. We have considered the rival submissions carefully. No doubt that in the cases relied on by the learned counsel for the assessee it is clearly held that if the fair market value of the particular asset is supported by the valuation report prepared by the registered valuer then reference to sec.55A the Valuation Officer is not correct. It was observed in the case of Urmila Bawa v. ACIT(2007) 16 (II) Income-tax Case Law (copy filed) that normally in the case of sale of asset assessee would tend to inflate the fair market value of land as on 1.4.1981 and it would be an attempt of the A.O. to place a lower value and, therefore, for such situation, clause (a) would not be applicable and only clause (b) to section 55A would be applicable. However, in the case before us the reference was made because according to the Assessing Officer the report given by the Registered Valuer was only a self-serving document. We find that following note was given in the statement showing capital gains attached with the computation of income regarding valuation report.
"This figure is subject to adjustment in the light of the valuation report which being obtained".
The above note which was given with reference to the estimated fair market value of land clearly shows that assessee was in the process of obtaining the valuation report from the some valuer and in the meantime the estimated fair market value of the land at Rs. 11.10 crores. Later on assessee filed the report from Shri R.J. Sethna vide letter dated December, 18, 2003. Copy of the report is placed at page 70 of the paper book 37 ITA No.746 & 883/M/08 M/s. Killick Nixon l:td.
which is dated 18th March, 1992. Though it was submitted during the hearing that this report was not traceable at the time of filing of the return and that is why the estimate fair market value was taken in the computation, but we fail to understand that if it was stated in the note to the return that report is being obtained which means assessee was in the process of receiving a report but filed a report which was prepared in March 1992. Further assessee had huge area of land out of which some portions were given to subsidiary companies and some other portions were leased out as per Lease Deed to Bharat Petroleum as reflected in the Valuation Report. The valuation report does not mention any purpose of valuation but very conveniently segregate the land which was ultimately given to Vysya Bank and valued the same at Rs. 19.76 crores. When there was no particular purpose of valuation the property should have been valued at one consolidated figure. All these factors very clearly indicate that this is only a make believe story and no valuation report was available on the date of filing of return. Further para 3.9.5 of the first appellate authority which we have reproduced earlier above, reads as under:
"3.9.5 In the same letter, the appellant requested for adoption of the valuation report prepared by Shri R.J. Sethna, another government approved registered valuer, for the purpose of valuing appellant's land in question. However, the appellant has not submitted any copy of the valuation report of Shri R.J. Sethna for my consideration and hence I am unable to take cognizance of appellant's submission in this regard. In the same letter dated 18.10.2004, the appellant requested for being permitted to appoint another registered valuer under the provisions of section 287A of the I.T.Act, 1961 for making submissions with regard to the valuation of the impugned land. For this purpose the appellant was given an opportunity, vide my letter No. CIT(A)-C-1/Misc/2004-05 dated 10.11.2004 to represent the matter through their registered valuer in terms of the provisions of section 287A of I.T. Act, 1961 and a hearing was fixed on 22.11.2004 in this regard. However, the appellant has so far not appointed any valuer for the purpose and there was no representation on its behalf on the appointed date of 22.11.2004. Hence I am left with no alternative but to adopt the fair market value of this land as on 1.4.1981 as fixed by the DVO."
51. The above para clearly shows that before the CIT(A) a request was made for appointment of another registered valuer and when opportunity was given no such 38 ITA No.746 & 883/M/08 M/s. Killick Nixon l:td.
appointment was made. If the report of Shri R.J. Sethna was correct then normally the assessee would have stood by that and produced the same person. All these factors very clearly show that assessee company had no real valuation report and therefore, the Assessing Officer was right in referring the matter to the valuation cell. We would further like to point out that in the case of Pooranmal vs. Director of Inspection (93 ITR 505), the Hon'ble Supreme Court while considering the issue regarding admissibility of evidence collected in the illegal search observed at page 528 that it was the relevancy of the evidence which was important and the test of admissibility of evidence lies in relevancy and the same could be admitted unless there is an express or implied prohibition for admission of such evidence. Therefore, in our humble view the reference made to the Valuation Officer was correct and the learned CIT(A) had correctly admitted that evidence.
52. It was objected before the learned CIT(A) that since it was mentioned in the assessment order that the assessment order would be rectified upon receipt of valuation report, the CIT(A) has no power to consider the valuation report and hence the capital gains could not be revised. We find this is not correct because it is trite law that CIT(A) have co-terminus powers, he can normally do what the A.O. can do. Reference may be made to the decision of the Hon'ble Supreme Court in the case of CIT v. Kanpur Coal Syndicate (53 ITR 225). The assessee had itself relied on this very decision before the CIT(A) for admission of additional ground [see page 11 of CIT(A)'s order]. Therefore, learned CIT(A) very rightly observed that he had co-terminus powers and could consider the valuation report sent by the A.O. This aspect would meet the objection of the learned Counsel for the assessee with respect to the proposition that if the report was not received during the pendency of assessment proceedings, the same would become invalid (by reference to the case of Reliance Jute Mills). Since the CIT(A) has same plenary powers as that of A.O. which means 39 ITA No.746 & 883/M/08 M/s. Killick Nixon l:td.
the proceeding before the CIT(A) are in fact in the nature of continuation of assessment proceedings.
53. However, we find force in the last submission of the learned counsel for the assessee in this respect that the learned CIT(A) was bound to consider the objections raised before him in respect of the valuation report of the DVO. Page 66 of the paper book clearly shows that through letter dated October 12, 2004 some objections were raised regarding valuation prepared by the DVO., particularly the objection regarding that the assessee does not fall in K(e) area but fell under 'L' area as per Notification paced at pages 79/85 of the paper book. Therefore, in the interest of justice, we set aside the order of the learned CIT(A) only to the extent of meeting and adjudicating the objection raised before him regarding valuation to his file. Needless to say that assessee should be given adequate opportunity to put forth its case.
54. Coming to the last aspect of the ground regarding disallowance of deduction on account of expenses incurred for eviction of unauthorized occupants is concerned, we find that the A.O. has observed in this regard at para 11.3, which reads as under:
"The assessee has not established the bonafides of payment and has also not given any proof of amounts payable, the agreement really appears to be self serving and it is been almost three years since the date of agreements and if there would have been any payments, the assessee would have given the details of the same and as the assessee was a mere guarantor of the land which was sold rather it was forcibly taken on account of default of the G.K. Rathi Group, for whom the assessee was a guarantor. The land valued more than Rs. 100 crores was taken away from the assessee and it would not be business prudent any way to facilitate the evacuation, if any, was there of illegal slum dweller or tenants and incurs a further costs in a case where one has got duped. This agreement and the provision appears to be a last minute thought to reduce taxable income as the agreement is dated 15th March, 2001 whereas, the land was transferred on 26-04-2000, as the land was already transferred then there was no reason for the assessee to pay the so called illegal occupancy, if any, and as assessee has not given any bonafide proof or justification, so the sum of Rs.1,00,00,000 is added back to computation of income and disallowed during the relevant year."
55. We agree with the findings of the Assessing Officer because no payment was made even after three years of the agreement. In any case, normal prudent person whose property is going from his hands because somebody else has failed to honour his commitment would not like to facilitate the peaceful possession of that property to 40 ITA No.746 & 883/M/08 M/s. Killick Nixon l:td.
such third person. Such prudent person would like to protect his property even by the means such as legal action against unauthorized occupants and delay the handing over of the possession of land. Even the names of persons to whom such compensation was payable could not be explained to us against the query made in this regard. Therefore, we agree with the observation of the lower authorities and confirm the disallowance of sum of Rs. 1 crore claimed towards the expenses for eviction of unauthorized occupants form the land.
56. As regards ground No.3 is concerned, after hearing both parties, we find that this claim was made for the first time by way of raising additional ground before the CIT(A). This additional ground has been referred by the CIT(A) in para 3, which reads as under:
"The learned Deputy Commissioner of Income-tax erred in assessing long term capital gain on acquisition of mortgaged land by Vysya Bank in pursuance to the agreement dated 4.4.19996.
The learned Deputy Commissioner of Income-tax ought to have allowed the entire amount of consideration determined on acquisition of land by Vysya Bank as business loss incurred by the appellant in the course of carrying on of business of providing guarantees.
57. The assessee company was the owner of a piece of land called "Chandivali" land admeasuring about 80,827 sq. mtrs. located in Powai Estate, Andheri (E), Mumbai. The assessee company had given a guarantee to the extent of Rs.100 crores in favour of Vysya Bank, Overseas Branch, Opera House, Mumbai. By giving the said land as security in respect of financial facilities extended by the said bank to M/s. Geekay Exim (India) Ltd. (in short 'GEIL'), a company belonging to G.K.Rathi Group vide agreement dated 4.4.1996. This facility was modified further on 20.12.1997 and credit guarantee was extended to Viplav Trading (P) Ltd., and Sabara Impex P. Ltd. We further find that the learned CIT(A) noted that this guarantee was given on the basis of one of the objects of the company, as per article iii(w) "To guarantee the payment of money unsecured or secured by or payable under or in respect of 41 ITA No.746 & 883/M/08 M/s. Killick Nixon l:td.
promissory notes, bonds, debentures, debenture-stock, contracts, mortgages, charges, obligations, bank overdrafts, instruments and securities of any company or of any authority, supreme, municipal, local or otherwise or of any persons whomsoever, and generally to guarantee or become sureties for the performance of any contracts or obligations". He has also noted that an agreement was entered with "GEIL" on 4.4.96, which, inter alia, contained the following clauses also:
"M/s. Geekay Exim (India) Ltd. hereby covenants with M/s. Killick Nixon Ltd., their successors in business and assigns to indemnity and secure and keep indemnified M/s. Killick Nixon Ltd., of, from and against all actions, suits proceedings, claims and demands that may be made by Vysya Bank against M/s. Killick Nixon Ltd. and all costs, charges, expenses, loss or damage that M/s. Killick Nixon Ltd. may suffer and/or incur under or in connection with the letter of guarantee (hereinafter referred to as the Guarantee) dated 4th April, 1996, executed by M/s. Killick Nixon Ltd. in favour of Vysya Bank (hereinafter referred to as the Bank.) In order to secure its obligations hereunder, M/s. Geekay Exim (India) Ltd., shall when demanded by M/s. Killick Nixon Ltd., deposit and keep deposited with M/s. Killick Nixon Ltd. such sum upto 10% of the facilities sanctioned by the Bank to M/s. Geekay Exim (India) Ltd. On the basis of the said guarantee. The said deposit shall be an interest free deposit and the same shall be refunded by M/s. Killick Nixon Ltd. to M/s. Geekay Exim (India) Ltd. or the Bank, as M/s. Geekay Exim (India) Ltd. may direct on M/s. Geekay Exim (India) Ltd., ceasing to enjoy the Bank facilities obtained by or availed of by M/s. Geekay Exim (India) Ltd. from the bank on the basis of Guarantee.
It is further agreed that M/s. Geekay Exim (India) Ltd., will pay to M/s. Killick Nixon Ltd. 2% of the gross realization of the export proceeds as commission on the business which is facilitated by the Bank facilities repayment of which has been guaranteed by M/s. Killick Nixon Ltd., as hereinabove stated. The commission shall accrue to M/s. Killick Nixon Ltd., on completion of the audit of the annual accounts of M/s. Geekay Exim (India) Ltd., for the period expiring on 31st of March immediately preceding and shall be paid within 30 days of completion of such audit. M/s. Geekay Exim (India) Ltd. shall furnish to M/s. Killick Nixon Ltd. long with payment, a certificate of their auditors as to the gross realization of the export proceeds. Provided, however, that if at the time of completion of the audit of the accounts of M/s. Geekay Exim (India) Ltd., for the year ended 31.3.1999, it is ascertained that the aggregate amount of the commission paid or payable for the three years ending 31.3.1999 falls short of sum of Rs. 6,00,00,000/- (Rupees six crores only), the amount of short fall shall be added to the commission payable for the year ended 31.3.1999 and shall be accordingly paid in the manner aforesaid. The amount of shortfall for every succeeding block of three years from the year ended 31.3.1999 shall be adjusted and paid in the manner as aforesaid. In the event of termination of this agreement for any reason 42 ITA No.746 & 883/M/08 M/s. Killick Nixon l:td.
whatsoever in the midst of block of three years, the amount of Rs. 6,00,00,000/- will be suitably adjusted on a pro-rata basis."
58. Before admission of additional ground, the CIT(A) referred the matter back to the Assessing Officer who objected for admission of the additional ground because according to him it was merely an after thought and the amount receivable was not written off. It was also stated by the Assessing Officer that the assessee was not in the business of giving guarantees and there was nothing common with G.K. Rathi Group. According to the Assessing Officer the guarantee to other parties is normally given after due verification and in this case no verification had been done by the assessee. This reply was sent to the assessee who, in turn, gave point-wise reply and ultimately the CIT(A) after considering the reply admitted the additional ground vide para 3.8.1 which reads as under:
"As the additional grounds of appeal spring from an issue which has been dealt with in the assessment proceedings and which is also a subject matter of the return of income filed by the appellant, the same are required to be admitted during the appellate proceedings notwithstanding the fact that the appellant had not raised this issue at the assessment stage. I am satisfied by the appellant's submission that the additional grounds of appeal could not be included in the Memorandum of Appeal (Form No.35) earlier as the appellant company was not able to get proper legal advice. Hence, in the substantial interest of justice. The additional grounds of appeal as raised by the appellant company are hereby admitted."
59. The learned CIT(A) before adjudicating the issue on merit raised the following queries:
"(i) Please submit a brief note on the history of business relations between M/s. Killick Nixon Ltd. and M/s. Geekay Exim (India) Ltd., to whom a guarantee was provided in respect of the loan taken by the latter from Vysya Bank Ltd. In the same note, please specify the business relation between your group of companies and G.K. Rathi Group of companies.
(ii) Please state the reasons s to why the issue relating to the alleged trading loss suffered as a result of providing guarantee to Vysya Bank Ltd. was not raised before the Assessing Officer during the course of assessment proceedings and why the same has been raised for the first time during the present appellate proceedings by way of an addition ground of appeal.43 ITA No.746 & 883/M/08
M/s. Killick Nixon l:td.
(iii) You have shown an income of Rs. 6 crore in the profit and loss account (schedule-I) for the year ending on 31.3.2001 explaining the same as "Guarantee Commission for prior years". Please give the details of this income and specify the relevant assessment years to which it pertains. Also explain the reasons as to why this income was not disclosed in the relevant previous years.
(iv) Please specify the date/dates on which the said amount of Rs. 6 crores was received by you. Please furnish a copy of your bank statement indicating the receipt of the amount from M/s. Geekay Exim (India) Ltd.
(v) On page 172 of the Paper book (annexure J), you have filed a copy of the extract of the minutes drawn at the meeting of Board of Directors held on 28.04.2000. as per the extract, Vysya Bank Ltd. was to re-transfer the company's Chandivali land admeasuring 49,911 sq.mtrs. against the payments to be made subsequently. Kindly explain the position of this re-transfer as on date.
(vi) Please explain the reasons as to why M/s. Geekay Exim (India) Ltd., failed to repay it loan to Vysya Bank Ltd. resulting into the latter being compelled to acquire your Chandivali land. Did the bank take any legal action against the original borrower?
(vii) The same loan in respect of which you had provided guarantee to the bank, was secured by another guarantee to the extent of Rs.127 crores given in the form of Avanti land belonging to a company of that name. Under these circumstances, please specify as to why M/s. Killick Nixon Ltd. had to part with its land to the bank."
60. Against this, the assessee gave the following detailed reply, which read as under:
"3. In para 2(1), Your Honour has asked us to give a brief note on the history of business relations as also to specify the business relations between the two groups:
In this connection we have to submit that since a number of years we had financial and commercial relationship with various entitles of G.K.Rathi Group. Both the Killick Nixon Group and G.K. Rathi Group are independent of each other but have certain common business interest. The relationship between the two groups was qua joint management and control of some common entities as also financial and commercial dealings.
47. In para 2(ii) your honour has asked to state the reasons for non-claiming of the trading loss in the return of income as also the reasons for raising the said claim in the additional grounds of appeal. With reference to the same we have to submit as under:44 ITA No.746 & 883/M/08
M/s. Killick Nixon l:td.
In this connection we have to submit that we had made a claim for deduction of the trading loss arising on account of the guarantee business carried on by us in the return of income filed for AY 2000-01. Hence, no separate claim was made in the return for AY 2001-02, which was filed on 31.10.2001. We withdrew the said claim on 28.3.2002, during the assessment proceedings for AY 2000-2001, by which date the time for filing the revised return of income for AY 2001-02 had lapsed. The said claim was withdrawn as, according to the legal advise received by us, the loss arose in AY 2001-02. Due to inadvertence and oversight, the claim remaining to be separately claimed during the course of assessment proceedings for AY 2001-02. Similarly, while presenting the memorandum of appeal before Your Honour, the ground relating to the claim of trading loss arising during the course of carrying on of guarantee business, inadvertently remained to be raised. When the appeal was fixed for hearing, we have raised the additional ground immediately. The lapse in not raising the ground, in the grounds of appeal filed, was inadvertent and due to oversight.
48. In para 2(iii) Your Honour has asked us to give the details of guarantee commission income of Rs.6 crores as also for not disclosing the same in earlier years. With reference to the same we have to submit as under:
The guarantee commission has been earned on account of the guarantee extended to M/s.Geekay Exim (India) Ltd. The said guarantee commission is due to us as per clause 3 of the agreement dated 4.4.1996. As per the said clause, we were to receive commission @ of 2% of the gross realization of exports proceeds as commission subject to a minimum guaranteed commission of Rs.6 crores. The amount of commission was to be paid within 30 days of the completion of audit of M/s. Geekay Exim (India) Ltd. In none of the three years, M/s. Geekay Exim (India) Ltd. has given any certificate as required under the said clause. Hence the minimum guaranteed commission has been reflected in the Profit & Loss Account for the AY 2001-02.
49. In para 2(iv) Your Honour has asked us to give the details of receipt of the guarantee commission. With reference tot the same we have to submit as under:
The amount of guarantee commission is yet not received.
50. In para 2(v) Your Honour has asked us to give the details of the re-transfer of land from Vysya Bank. With reference to the same we have to submit as under:
As per the agreement entered into with Vysya Bank, we had an option of reacquiring the land. We have not exercised the said opinion and in fact we have given a release deed to Vysya Bank.
51. In para 2(vi) Your Honour has asked us to give the reason of M/s. Geekay Exim (India) Ltd.'s failure to repay its loan to Vysya Bank and whether the bank has taken any action against the original borrower.
With reference to the same, we have to submit as undr:
45 ITA No.746 & 883/M/08
M/s. Killick Nixon l:td.
We are not aware of the reason s of M/s. Geekay Exim (India) Ltd.'s failure to repay its loan. Similarly, we are not aware whether any action has been taken by the bank against the original borrower.
9. In para 2(vii) Your honour has asked us to specify the reasons why had to part with the land since the loan taken by G.K. Rathi Group was secured by land offered as security by another company. With reference to the same, we have to submit as under:
In satisfaction of the guarantees extended to Vysya Bank by us and the other company, we have to sell our land for the guaranteed amount of Rs.105 crores. The basis of determination of the aforesaid liability against us and the other company, has been co-related with the realization of the sale proceeds of properties which were mortgaged to the bank."
61. The learned CIT(A) after considering the submission decided this issue vide para 3.8.5 which reads as under:
"After careful consideration of all the facts of the case as discussed above, I am of the opinion that the appellant has not carried out the activity of providing the impugned guarantee to Vysya Bank Ltd. in the normal course of conducting its business. Though it is true that the appellant company's Memorandum and Articles of Association authorizes the business activity of providing guarantees but the appellant company has admittedly not carried out this business activity at any time in its long history except in the solitary instance of providing guarantee to M/s. Geekay Exim (India) Ltd. The appellant company, as per its Certificate of Incorporation, was incorporated on 14.11.1947 and it has never indulged in a business activity of providing guarantees except once as discussed above. Therefore, I am unable to accept the argument of the learned AR that the said guarantee to Vysya Bank was provided by the appellant in the normal course of its business. The appellant company is following mercantile system of accounting but it has never accounted for the commission income in its returns of income filed after entering into the contract with M/s. Geekay Exim (India) Ltd. till the impugned assessment year when it has shown an income of Rs. 6 crores in respect of the alleged guarantee business and the same has been shown as pertaining to 'prior years'. If such a business was genuine, the guarantee commission income would have been shown by the appellant company on a regular basis from the date of contract. The appellant's failure to do so proves that this has never been a regular business activity. It is equally important to notice that the appellant, as per the agreement with M/s. Geekay Exim (India) Ltd. was entitled to receive commission @ 2% of the gross export realizations of that company and the appellant has never bothered to realize even one rupee by way of commission from M/s. Geekay Exim (India) Ltd. either upto the stage of parting with its land to the bank or even thereafter. In view of this undisputed fact that no income has been earned by the appellant as a result of the alleged business activity, it is impossible to accept that the said guarantee was provided by the appellant I the normal course of conducting its business. It is not reasonable to believe that any prudent businessman would risk 46 ITA No.746 & 883/M/08 M/s. Killick Nixon l:td.
his land worth Rs. 105 crores in a business adventure such as the appellant had done, without first ascertaining the returns to be received. If the appellant's action of providing said guarantee is to be treated as a genuine business activity, it is not understandable as to why the appellant failed to keep a deposit of a sum upto 10% of the facilities sanctioned by Vysya Bank to M/s. Geekay Exim (India) Ltd., on the basis of the guarantee provided by the appellant, as per the second clause of the appellant's agreement with M/s. Geekay Exim (India) Ltd. Moreover, the appellant has been showing these companies of G.K. Rathi Group as its debtors and such debts had, as observed by the Assessing Officer, not been written off or treated doubtful in the appellant's books of accounts. This itself goes to prove that the appellant's theory of suffering a business loss in the impugned transaction, is merely an afterthought and not a genuine claim. Such an afterthought has come as a result of the investigation done by the A.O. to prove appellant's claim regarding short term capital loss on sale of shares as being bogus and the same short capital loss was stage-managed by the appellant for setting off against the long term capital gain on transfer of its Chandivali land to Vysya Bank. Considering all thee facts, I hold that the appellant's action of providing guarantee to Vysya Bank in respect of the financial facilities provided to M/s. Geekay Exim (India) Ltd. by that bank, was not in the normal course of conducting the appellant's business and, therefore, the resultant loss allegedly suffered by the appellant cannot be allowed as a trading loss or a business loss from the appellant's income as requested in the additional ground of appeal. The amount appropriated by Vysya Bank can not be considered even for the purposes of section 48(2) while computing the taxable long term capital gain in respect of the impugned transfer of land. For this purpose, I place reliance on the decision of Hon'ble Supreme Court in the case of CIT vs. Attili N. Rao (252 ITR 880). The additional ground of appeal in this regard, therefore, stands dismissed."
62. Before us the learned counsel for the assessee mainly submitted that the object clause in the Memorandum of Association clearly provided that assessee company was also authorized to engage in the business of providing guarantees and this has not been denied by the Department. Further, a sum of Rs. 6 crores was accounted for in the annual account for the assessment year 2000-01 but the same was not returned as taxable because the guarantee commission was not received by the assessee company. However, the Assessing Officer held that this amount to be taxable. An additional ground in this respect was raised before the CIT(A) that this amount should have been allowed to be reduced from the loss suffered, but, however, the same was not allowed. The amount of Rs. 6 crores on account of guarantee commission was held to be taxable which has been confirmed by the Tribunal in its 47 ITA No.746 & 883/M/08 M/s. Killick Nixon l:td.
order at para 127 (paper book page 63). He submitted that the assessee company has accepted this finding and not filed any appeal which means guarantee commission duly stand returned.
63. The assessee company had given guarantee to Vysya Bank in favour of GEIL M/s. Sabara Impex Ltd. M/s. Viplav Investments Ltd. for granting the limits by the Bank to that company. Since GEIL and other financial companies failed to honour their commitment, assessee company had to part with its land and, therefore, suffered a loss of Rs. 105 crores. He submitted that guarantee was given during the course of business and, therefore, it would amount to business loss. He also filed certain copies of the suites for recovery filed against GEIL to show that the assessee company was trying its best to recover the money lost in the guarantee.
64. He submitted that any amount lost in giving the guarantee is allowable as a trading loss and in this regard he referred to the decision of the Hon'ble Bombay High Court in the case of CT v. F.M,. Chennai and Co.Pvt. Ltd. (74 ITR 780). In the case of CIT vs. K.M. Modi (141 ITR 903) where, the assessee company was engaged in the composite business of production of films, leasing of cinema and film business and then loan to another producer was guaranteed during the course of business, then loss incurred on such guarantee was held to be allowable. Similar view was taken in the following cases:
(i) Lalvani (T.J.) v. CIT 78 ITR 1766(Bom)
(ii) CIT vs. S.A.S. Ramaswamy Chettiar (14 ITR 236)(Mad.)
(iii) Essen P. Ltd. v. CIT (65 ITR 625)
(iv) CIT v. S.P. Balasubramaniam (250 ITR 127 (Mad.)
(v) CIT v. Krishnaswami (TN) (150 ITR 365) He has also submitted that such loss was to be allowed in a year in which the same was incurred. In this regard he relied on the decision of Addl. CIT v. Glassminiature Bulb Inds. (130 ITR 41 (Allahabad) and this decision was confirmed by the Hon'ble 48 ITA No.746 & 883/M/08 M/s. Killick Nixon l:td.
Supreme Court in the case of Glassminiature Bulb Inds. V. CIT (Addl.) 204 ITR 352. He submitted that it is wrong to quote that since the claim was not written off and therefore, the same is not allowable because it has been held by the Punjab & Haryana High Court in the case of Laxmi ginning and Oil Mills Pvt. Ltd.(82 ITR 958) that pendency of litigation of the loss suffered cannot militate against the fact that loss was suffered by the assessee during the accounting year in question and the amount of that loss cannot be postponed in view of the pendency of litigation.
65. On the other hand, the learned Departmental Representative while strongly supporting the order of the lower authorities submitted that in the relevant years the debt was treated good. He also argued that if all the factors are considered together, it would clearly show that guarantee was not given in the normal course of business and it was only a make belief story.
66. We have considered the rival submissions of the parties in the light of material on record as well as the decisions cited by the parties. We are unable to agree with the submissions of the learned counsel for the assessee because the act of giving guarantee seems to have been done not in the normal curse of business. No doubt there is a clause as considered by the learned CIT(A) in the Memorandum of Articles authorizing the company to give the guarantee but it is very surprising that the assessee company which was incorporated in the year 1947 has never issued single guarantee during its business in the last 50 years before issuing this guarantee. Though the learned CIT(A) asked specific question that what was the history of business relations of the assessee company with GEIL it was merely stated that they were having some commercial relationship. Even before us to a pointed query in this regard it was submitted that assessee company had some commercial relations with CEIL and G.K. Rathi Group and that there were common directions in some of the group companies.
49 ITA No.746 & 883/M/08
M/s. Killick Nixon l:td.
67. There was a clear covenant in the agreement dated 4.4.1996 which reads as under:
"In order to secure its obligations hereunder, M/s. Geekay Exim (India) Ltd., shall when demanded by M/s. Killick Nixon Ltd., deposit and keep deposited with M/s. Killick Nixon Ltd. such sum upto 10% of the facilities sanctioned by the Bank to M/s. Geekay Exim (India) Ltd. On the basis of the said guarantee. The said deposit shall be an interest free deposit and the same shall be refunded by M/s. Killick Nixon Ltd. to M/s. Geekay Exim (India) Ltd. or the Bank, as M/s. Geekay Exim (India) Ltd. may direct on M/s. Geekay Exim (India) Ltd., ceasing to enjoy the Bank facilities obtained by or availed of by M/s. Geekay Exim (India) Ltd. from the bank on the basis of Guarantee."
68. The above clearly shows that assessee could have taken a sum upto 10% of the facilities mentioned by the bank to GEIL on the basis of the said guarantee. No reason whatsoever has been given before the learned CIT(A) not even before us for not complying with this clause. When the assessee is giving its land worth more than Rs. 100 crores as guarantee to outsider because admittedly the other party is not related to the assessee company, then any prudent person would take immediate precaution which was possible under the agreement.
69. Though the guarantee was given vide agreement dated 4.4.1996 and ultimately the guarantee was given somewhere in 1997 but no guarantee commission was received or accounted till assessment year 2001-02. The only logic which seems to be there for giving away the company's property was the motive of earning guarantee commission. It has to be kept in mind that the property belonged to the company which was stated to be listed at the relevant point of time, which means the directors were holding position of fiduciary trustees on behalf of shareholders and should not have allowed the property to be alienated without taking any care and if the purpose was to earn guarantee commission then why no guarantee commission was taken almost for three years is not clear. Even the amount which was accounted in the assessment year 2000-01 was never received by the assessee company and there is nothing on record to show that assessee tired to recover this money. 50 ITA No.746 & 883/M/08
M/s. Killick Nixon l:td.
70. The learned CIT(A) raised the following query:
"On page 172 of the Paper book (annexure J), you have filed a copy of the extract of the minutes drawn at the meeting of Board of Directors held on 28.04.2000. as per the extract, Vysya Bank Ltd. was to re-transfer the company's Chandivali land admeasuring 49,911 sq.mtrs. against the payments to be made subsequently. Kindly explain the position of this re-transfer as on date."
In response to the above, it has been stated as under :
"We are not aware of the reason s of M/s. Geekay Exim (India) Ltd.'s failure to repay its loan. Similarly, we are not aware whether any action has been taken by the bank against the original borrower".
It is not clear why this option was not exercised.
71. Further CIT(A) raised query No. 6 which reads as under:
"Please explain the reasons as to why M/s. Geekay Exim (India) Ltd., failed to repay it loan to Vysya Bank Ltd. resulting into the latter being compelled to acquire your Chandivali land. Did the bank take any legal action against the original borrower?"
Against this the following reply was given:
"We are not aware of the reason s of M/s. Geekay Exim (India) Ltd.'s failure to repay its loan. Similarly, we are not aware whether any action has been taken by the bank against the original borrower".
72. The above explanation shows that assessee never bothered to find out why the other party had not paid its dues which shows total indifference on the part of the assessee company indicating that the whole transaction was a make belief story and that was why the assessee company never bothered why the other company was not able to pay. Nothing has been shown to us whether the assessee company or the bank tried to recover the dues from GEIL though the suit of recovery seems to have been filed but the same has been filed very late when the said land was taken over by the bank. We fail to understand why the assessee company would not file the suit before handing over the land to the bank and to make even the bank a party to such suit in an endeavour to save the land of the company. It is interesting to note that the assessee company had gone ahead to reach a compromise with unauthorized occupants of the said land so as to facilitate peaceful handing over the land to the 51 ITA No.746 & 883/M/08 M/s. Killick Nixon l:td.
bank as is clear from that "A' is claiming sum of Rs. 1 crore to be paid for vacation of this land.
73. Query No. 7 raised by the CIT(A) read as under:
"The same loan in respect of which you had provided guarantee to the bank, was secured by another guarantee to the extent of Rs.127 crores given in the form of Avanti land belonging to a company of that name. Under these circumstances, please specify as to why M/s. Killick Nixon Ltd. had to part with its land to the bank."
The reply given by the assessee reads as under:
"In satisfaction of the guarantees extended to Vysya Bank by us and the other company, we have to sell our land for the guaranteed amount of Rs.105 crores. The basis of determination of the aforesaid liability against us and the other company, has been co-related with the realization of the sale proceeds of properties which were mortgaged to the bank."
74. When the loan in respect of which the assessee company had provided guarantee was also secured by another guarantee given by another company then why the liability was not shared by another company is not clear and nothing has been said in this regard before us.
75. We have observed certain other very interesting facts. On the one hand it was urged before the lower authorities and even before us that the assessee company had given the guarantee in the normal course of business and since the GEIL group failed in its commitment the assessee company had to part with its land. It is to be noted here that the assessee company agreed to transfer its land to Vysya Bank vide agreement dated 29th September, 1999, later on when the assessee company was trying to organize funds for making investments in the subsidiary companies a sum of Rs. 34.87 crores was raised from GKAK Rathi Group, Rs. 5.50 crores from Subhau Investment Ltd. and Rs.1.3 crores from Viplav Trading Ltd. The last two mentioned companies also belonged to GKAK Rathi Group. On the one hand GKAK Rathi Group is not able to honour the commitments to Vysya Bank made by their company GEIL and on the other hand they are ready to finance the assessee company to the tune of Rs. 40 crores for buying shares in the subsidiary companies. We fail to understand if the 52 ITA No.746 & 883/M/08 M/s. Killick Nixon l:td.
assessee company had good relations to arrange the finance from GK Rathi Group then why the assessee company could not recover the other dues from GEIL belonging to GKAK Rathi Group. Further, while going through the issue regarding allowability of short term/long term capital loss, it was observed by the Assessing Officer that assessee company invested in four subsidiary companies, which in turn, invested in M/s. Kosha Investments Ltd., which is also controlled by the assessee, which in turn, gave a sum of Rs. 4.66 crores to M/s. Subara Impex Ltd., and Rs. 75 lakhs to Geekay Exim (India) Pvt. Ltd. which are the companies responsible for causing the loss on account of parting of land by the assessee company.
76. To sum up the above analysis and applying the theory of human probabilities as propounded by the Hon'ble Supreme Court in Smt. Sumati Dayal (supra), we are of the view that these guarantees given by the assessee company is only a make belief story but reality is something different and accordingly the loss incurred by the company on account of parting of the land is also of a make belief nature, which has been correctly rejected by the lower authorities.
77. Since the whole of the case law relied by the learned counsel for the assessee pertains to basically two points (a) whether the loss is incurred on account of providing guarantee are allowable or not and (b) in which year such losses have to be allowed, we have not dealt with them because in our view the loss itself is not genuine and there is no point in dealing with the case law. In these circumstances, we find nothing wrong with the order of the learned CIT(A) and we confirm the same.
78. As far as ground 4 is concerned, after hearing both the parties, we find that during the assessment proceedings, it was noticed that assessee had claimed secret commission of Rs. 1,15,25,000/-.In response to the query it was submitted that commission was paid to various dealers of the company and the payment was restricted only to those dealers who were loyal to the company for many years. It was also claimed that because of this commission, the turnover of the assessee company 53 ITA No.746 & 883/M/08 M/s. Killick Nixon l:td.
had increased. The AO after considering the explanation observed that since the names and addresses of the persons to whom such commission was paid and the nature of services provided by such dealers was not furnished, such expenditure could not be allowed and therefore, he disallowed the secret commission.
79. Before the CIT(A) it was mainly submitted that commission was paid on the basis of authorization given by the Board of Directors and was paid in the interest of business. The learned CIT(A) decided this issue vide para 6.3 which reads as under:
"I have carefully considered the facts of the case. As per the provisions of section 37 of the I.T.Act 1961 any expenditure which is not capital or personal nature, can be claimed as a deduction provided the same has been incurred wholly and exclusively for the purposes of assessee's business or profession. In the case of the appellant, an expenditure of Rs. 1,15,25,000/- has been claimed on account of commission payment but the appellant has not disclosed the names of the persons to whom such commission payment was allegedly made. In the absence of the names and addresses of the recipients of such commission, it was not possible for the A.O. to examine whether the commission payment was made wholly and exclusively for the purposes of appellant's business. In other words, the condition prescribed in section 37 of the I.T.Act, 1961 for allowing such an expenditure as a deduction, was satisfied by the appellant. Accordingly, the A.O. was justified in disallowing the appellant's claim for deduction on account of secret commission. In this regard I place reliance on the decision of Hon'ble jurisdictional High Court in the case of Goodlass Nerolac Paints Ltd. v. CIT ( 137 ITR 58) wherein it has been held that the burden is on the assessee to prove that the expenditure claimed was laid out wholly and exclusively for the purposes of business. I further place reliance on the decision of Hon'ble Supreme Court in the case of French Dyes and Chemicals (I) Pvt. Ltd. v. CIT (201 ITR 253) wherein the deduction on account of secret commission was held to be disallowable on account of the assessee refusing to disclose names of the recipients of such commission. Lastly, I place reliance on the decision of Hon'ble Orissa High Coourt in the case of Tarini Tarpuline Products v. CIT (254 ITR
495) wherein the question "Whether, on the facts and in the circumstances of the case, the Tribunal was justified in disallowing the secret commission alleged to have been paid by the assessee to persons whose names it could not disclose or evidence of any such payment was not adduced" was answered by the Hon'ble Court holding that secret commission is not deductible u/s.37 of I.T.Act, 1961. On the basis of the above discussed facts of the appellant's case and various judicial pronouncements, I hold that the A.O. was justified in disallowing the appellant's claim regarding payment of secret commission. This ground of appeal is dismissed."54 ITA No.746 & 883/M/08
M/s. Killick Nixon l:td.
80. Before us the learned counsel for the assessee submitted that similar disallowances were made in earlier years also and ultimately the matter traveled to the Tribunal and the same has been remanded back to the file of the AO. He particularly invited our attention to page 44 to 49 of the paper book which is the copy of the order of the Tribunal wherein the matter was set aside to the file of the A.O. vide para 85.
81. On the other hand, the learned D.R. strongly supported the order of the lower authorities.
82. We have considered the rival submissions carefully. We had asked the learned counsel for the assessee that what happened to the set aside proceedings of the earlier years and he fairly admitted that since the assessee could not furnish the name, addresses of the parties to whom such secret commission was paid and therefore, the addition has been repeated. We further asked the learned counsel for the assessee whether it is possible for the assessee company to furnish the names before us he showed his inability. Since the assessee is not in a position to furnish the names and addresses of the persons to whom the secret commission has been paid and therefore, following the decision of the Hon'ble Supreme Court in the case of French Dyes & Chemicals (I)_ Ltd. v. CIT (201 ITR 253) relied on by the CIT(A), this issue is decided against the assessee.
83. As far as Ground No.5 is concerned, after hearing both the parties, we find that certain interest were disallowed because according to him, some interest bearing funds were diverted for other purposes. On appeal the addition has been confirmed by the CIT(A).
84. Before us the learned counsel for the assessee mainly submitted that identical issue has been set aside to the file of the AO for the assessment year 1999-2000 and in this regard he referred to paras 111 to 114 of the Tribunal order placed at page 58 to 59 of the paper book. He also filed a copy of the assessment order of earlier year 55 ITA No.746 & 883/M/08 M/s. Killick Nixon l:td.
relevant to the assessment year to point out that the nature of disallowance was similar to the assessment year in question.
85. On the other hand, the learned DR supported the orders of the lower authorities.
86. After considering the rival submissions and the orders of the Tribunal in various years particularly for the assessment year 1999-2000 in ITA No. 842/M/03, we set aside the order of the learned CIT(A) and remit the same back to the file of the AO with direction to re-examine the whole issue in the light of the directions given in the previous years.
87. Ground No. 6 is regarding levy of interest under section 234B and 234C of the Act and which is of consequential nature and the AO is, therefore, directed to levy interest u/s.234B and 234C as per the provisions of the Act.
88. In the result, the assessee's appeal is partly allowed for statistical purposes. ITA No. 883/M/05: (Revenue's appeal)
89. In this appeal the revenue has raised the following grounds:
"1. On the facts and in law the Ld.CIT(A) has erred in not considering the report of the DVO in full, for determining the capital gain on the sale of the Chandhivli properties.
2. On the facts and in law, the Ld.CIT(A) has erred in ignoring the value of the Chandivli property converted from capital asset to stock-in- trade as on 31.3.1997 which was shown at Rs. 114.03 Cr. In the books of the assessee instead of adopting the value at Rs. 104.30 cr. given by the DVO thereby giving the benefit to the assessee on account of taxability of sale of asset as capital gain as against the business income."
90. After hearing both the parties we find that there seems to be some confusion in the ground raised by the revenue. Para 4.5 of the assessment order reads as under:
"Meanwhile the assessee converted its land into stock in trade by its Board resolution on 27/3/97 at a value of Rs.114.03 crores. Thus the land of the assessee was converted to stock in trade, but it still continued to be a security with the Vysya Bank."56 ITA No.746 & 883/M/08
M/s. Killick Nixon l:td.
91. On careful perusal of the assessment order shows that Assessing Officer has computed the capital gains at para 4.10 and there he has taken the value of consideration at Rs.94,79,69,059/- which is the same amount as returned by the assessee. It seems that the Assessing Officer has not dealt with the issue regarding taxability of profits under section 45(2) of the Act. The learned CIT(A) has later on changed the amount of capital gains but he has dealt with only regarding the cost of acquisition i.e. fair market value as on 1.4.1981 which he has revised as per the report of the DVO and he also seems to have not dealt with the issue regarding profits u/s.45(2) of the Act. Therefore, in the interest of justice, we restore this issue back to the file of the A.O. with direction to re-examine the issue after providing adequate opportunity to the assessee.
92. In the result, the Revenue's appeal is allowed for statistical purposes.
Sd. Sd.
(R.V. Easwar) (T. R. Sood)
Senior Vice-President Accountant Member
Mumbai dated the ___-_____March, 2010.
Copy to:
1. The Assessee
2. The Revenue
3. The CIT, Central I, Mumbai.
4. The CIT(A), Central -I, Mumbai
5. The DR 'C' Bench, Mumbai
By order
/True copy/
Kn\
Asst. Registrar, ITAT, Mumbai
Order pronounced on this 6th day of April, 2010.
Sd. Sd.
(R.V. Easwar) (B. Ramakotaiah)
Senior Vice-President Accountant Member
Mumbai, dated the 6th April, 2010.