Bombay High Court
Dy. Cit vs Mahendra M. Mehta on 30 March, 2004
Equivalent citations: (2004)89TTJ(MUMBAI)1
ORDER
Pramod Kumar, A.M.:
This is an appeal filed by the revenue and is directed against the order dated 19-3-1999, passed by the Commissioner (Appeals) for the assessment year 1994-95.
2. By way of this appeal, the revenue has raised the following grievances:
1. On the facts and in the circumstances of the case and in law, the learned Commissioner (Appeals) has erred in directing the assessing officer to allow the claim of assessee regarding setting off capital loss of Rs. 24,17,049 suffered on sale of 991 shares of Maharana Mills Ltd., against the long-term capital gains of Rs. 11,54,464 earned on sale of shares of Saurashtra Cement & Chemical Industries Ltd. particularly because the sale of shares of Maharana Mills Ltd., which company was under liquidation was made to a family concern of the assessee thereby being devoid of any genuine commercial consideration.
2. On the facts and in the circumstances of the case, the learned Commissioner (Appeals) erred in facts and in law in not taking cognisance of findings of the fact by the assessing officer at para 3 of the assessment order that M/s Sameta Exports (P) Ltd., a closely held company, was fully controlled by the assessee and therefore the shares of Maharana Mills Ltd., a company in liquidation, all the more was not eligible for transfer of shares as the transaction was devoid of any commercial content and Mahendra N. Mehta was having the only object of cutting down the tax liability accruing from long-term capital gain.
In substance, thus, solitary grievance of the revenue is that, since the transaction of sale of 911 shares in Maharana Mills Ltd., was devoid of any genuine commercial motive, and was entered into solely to reduce the tax liability, the Commissioner (Appeals) ought to have held that the loss incurred in this contrived transaction was not eligible for set off against the long-term capital gains accruing to the assessee in other genuine transaction(s).
3. In order to properly adjudicate on the controversy requiring our adjudication, it is necessary to take a careful look at factual matrix of this case and at the applicable legal position.
4. Briefly, the material facts bereft of unnecessary details. The assessee is an individual, and the main sources of his income consist of income from salary, dividends, director's fees and director's commission etc. During the relevant previous year, the assessee also earned long-term capital gains of Rs. 11,54,464 on sale of 22,820 shares of Saurashtra Cement and Chemical Industries Ltd. The assessee, however, claimed that the assessee has also incurred a loss of 24,17,049 on sale of shares in Maharana Mills Ltd. (MML, hereinafter referred to as), which is in the nature of long-term capital loss, and is required to be set off against longterm capital gains of Rs. 11,54,464. It is this claim for set off which has given rise to this litigation before us.
5. During the relevant previous year, the assessee had sold 991 shares for a consideration of Rs. 1 per share. The total consideration on sale of these shares thus aggregated to Rs. 991. These shares were sold to one private limited company by the name of Sameta Exports (P) Ltd. Incidentally, this Sameta Exports (P) Ltd. had only two shareholders, namely Smt. Santokhben Mehta and Km. Savitaben Mehta both of whom are related to the assessee, Smt. Santokhben Mehta being assessee's mother, and Km. Savitaben Mehta being assessee's sister. It is also relevant to note that the assessee had purchased the shares in MML on 31st Dec., 1999 at a consideration of Rs. 100 each, and that the said company MML, was under liquidation at the material point of time, i.e., when the shares in MML were sold to Sameta Exports. A question was put to the assessee that when company was undergoing liquidation, how could the assessee sell the shares to anyone because such a transfer could not be registered in the name of the transferee. While the assessee fairly admitted that the transfer of shares could not take place, he also pointed out that the assessee has executed an indemnity bond which, in substance, provides that in case the assessee, in his capacity as registered shareholder of MML, in liquidation, receives any amount, he shall hand over the same to the transferee. It was thus contended that whether or not the transfer of shares is registered in the books of the company, beneficial ownership of the shares, for all practical purposes, stands transferred. The assessing officer also discussed the legal provision regarding sale of shares and observed that, since the purpose of this sale transaction was to 'defeat the provisions of law', and that the transaction was intended to be "a conspiracy between the seller and purchaser to defraud the revenue and therefore the maxim 'in pari delicto was applicable. It was in the background of these facts that the assessing officer questioned commercial motives of this sale transaction and, not satisfied with the answers by the assessee- concluded as follows ..
"Since the assessee and Sameta Exports (P) Ltd. have entered into an agreement with a view to transfer the non-transferable shares against the liquidation rules framed, and is therefore void. The said transaction is entered into mainly to avoid the payment of taxes and therefore defraud the income-tax. If the assessee is allowed to take the benefits of the above transaction, then it will defeat the purpose of liquidation rules as well as the Income Tax Act. In view of the above the share transaction between the assessee and Sameta Exports (P) Ltd. is being held as null and void."
The assessing officer thus held that the assessee is not eligible to claim that the long-term capital loss incurred on sale of MML, shares cannot be set off against the long-term capital gains earned on sale of Saurashtra Cement and Chemical Industries Ltd. Aggrieved by the action of the assessing officer, the assessee carried the matter in appeal before the Commissioner (Appeals) who reversed the action of the assessing officer by observing as follows "I have considered the rival submissions and gone through the decisions relied upon. It is noted that
(a) The assessing officer has never controverted the valuation of shares of Maharana Mills by calculating its value of shares as per rules provided for valuation of unquoted equity shares. Mere remark that sale of price of Re. 1 per share was very meager cannot negate the appellant's claim that the liabilities of Maharana Mills Ltd. far exceeded its assets and even Re 1 per share was a good business offer.
(b) The assessing officer could have happily taxed the capital gains if there was income out of this transaction. Merely because the transaction resulted into a loss, the action of the appellant cannot be termed as manipulative.
(c) In any case since Maharana Mills was a loss-incurring concern and the value of shares had reached a negative point, the assessee was all along carrying loss incurring asset. Therefore, it was for him to decide in which year to sell the loss incurring asset.
(d) The entire argument of the assessing officer has been built on one factor that, since the shares cannot be registered in the name of buyer in view of the liquidation proceedings, the transaction cannot be treated as valid. However, as there is no bar on the transfer of shares whether the transfer of shares have taken place prior to commencement, or after the commencement, of liquidation proceedings, the liquidation proceedings cannot render the transaction void ......
The questions raised by the assessing officer as to why the appellant and the buyer should undertake such a transaction or why the appellant had bought the shares of a mill which was earlier incurring losses, these are the questions of business prudence which are best left to the will of the appellant only and does not come in the purview of the tax administration authorities.
In view of the above, the assessing officer is directed to allow the claim of the appellant regarding setting off capital loss against the capital gain, as made in the return. The carrying forward etc. would consequentially follow. This ground succeeds. "
Aggrieved by the relief so given by the Commissioner (Appeals), the revenue is in appeal before us.
6. We have heard Shri Sabnis, learned Departmental Representative, and Shri Hegde, learned counsel for the assessee. We have carefully perused the material before us and duly considered the applicable legal position as also factual matrix of the case.
7. First question before is whether it is open to revenue to hold that the impugned transaction, i.e., the transaction whereby the assessee has sold the MML shares to Samta Exports (P) Ltd., is "null and void". A lot of emphasis is laid by the Departmental Representative on the plea that since, on account of the Maharana Mills Ltd., being under liquidation, the shares in question could not have been transferred to the transferee, the sale of shares is non-existent in the eyes of the law. This plea does not, however, impress us because it is not the legal position that there is any prohibition on sale of shares of companies under liquidation but the law at best prohibits the registration of transfer deeds during the course of liquidation proceedings. Therefore, during the liquidation proceedings, while legal ownership may not be transferred, there is no bar on transfer of beneficial ownership. In the case before us, by way of the indemnity bond, the assessee has ensured that the beneficial ownership is also transferred inasmuch as he has undertaken to surrender, to the transferee, any amounts that he may receive in his capacity as registered owner of the shares. The assessee continues to be a registered owner but he holds that position, until the time transfer takes place, in purely fiduciary capacity and not as a beneficial owner. We may also, in this regard, refer to the following observations of Hon'ble Delhi High Court in the case of H.L. Seth v. Wearwell Cycles Co. (India) Ltd. 64 Comp Cases 497 (Del) :
"It could not be disputed that between the transferor and transferee, a transfer of shares executed after the commencement of winding up was valid, whether it was executed in performance of a contract made before or after that time."
Later in the same judgment, Their Lordships have, inter alia, further observed as follows "The question then arises whether a direction is to be issued to the Official Liquidator to register the transfer of shares in question. As noted above, it has not been pointed out that whether transfer of such shares would be against the interest of the company in any way. Rather it is apparent that the agreement was entered into between the parties honestly and in the ordinary course of business. The law which makes transfer of shares and alteration in the status of members void, operates for the benefit of the company and its creditors and not for the benefit of any third party ................
It appears to me that the court has full discretion in the matter of transfer of shares where the company is being wound up and that exercise of discretion of the court would be controlled only by the general principles of justice and fairness. "
Our understanding of the legal position is thus like this. While there is no bar on sale of shares of a company under winding up, the transfer of such shares in the name of the transferee cannot be claimed as a matter of right. Such a legal position cannot, obviously, render the very sale transaction illegal. No doubt there is legal restriction on transfer of shares and for alteration in the status of members, the law which makes transfer of shares and alteration in the status of members void, operates for the benefit of the company and its creditors and not for the benefit of any third party. In any event, Hon'ble Courts have full discretion to direct registration of transfer of shares-a discretion which would be controlled only by the general principles of justice and fairness. What is 'void' under the Companies Act is, upon commencement of winding up proceedings, the transfer of shares and alteration in the status of members, and not the sale of shares itself. In view of these discussions, we are of the considered view that the Commissioner (Appeals) was quite justified in vacating assessing officer's findings about the sale transaction itself being "null and void".
8. The second, and perhaps more fundamental, question is whether the impugned transaction of sale of shares can be viewed as a colourable device solely for avoiding taxes, and if so, what is the impact of such a finding. In the case of McDowell & Co. Ltd. v. CTO (1985) 154 ITR 148 (SC), Chinnappa Reddy J's views, which were unambiguously endorsed by other four Honble Judges speaking through Rangnath Mishra J. are important in this regard. He observed that "in our view the proper way to construe a taxing statute, while considering a device to avoid tax, is not to ask whether a provision should be construed literally or liberally nor whether the transaction is unreal and not prohibited by the statute, but whether a transaction is a device to avoid tax, and whether the transaction is such that judicial process may accord approval to it." Explaining this judgment, and after carefully analysing the observations made in this judgment, Their Lordships of Hon'ble Gujarat High Court, in the case of Banyan & Berry v. CIT (1996) 222 ITR 831 (Guj), inter alia, observed as follows :
"The court nowhere said that every action or inaction on the part of the taxpayer which results in reduction of tax liability to which he may be subjected to in future, is to be viewed with suspicion and be treated as device for avoidance of tax irrespective of the legitimacy or genuineness of the act; an inference which unfortunately, in our opinion, the Tribunal appears to have drawn from enunciation in McDowell's case ........
....... what has been depreciated as tax planning for avoidance of tax are those acts which have doubtful or questionable character as to their bona fides or righteousness. Not all legitimate acts of a taxpayer, which in the ordinary course of conducting his affairs a person does and under law he is entitled to do, can be branded as of questionable character on the anvil of McDowell (supra). We are unable to read in the aforesaid decision that any act of an assessee which results in reduction of his tax liability or expectation of tax benefit in future amounts to a colourable device, a dubious method or subterfuge to avoid tax and can be ignored if the acts are unambiguous or bona fide, merely on the ground that treating those as deliberate would result in tax liability in future.
While the tax planning adopted as a device to avoid tax had been depreciated, principles cannot be read as laying down the law that a person is to so arrange his affairs as to attract the maximum tax liability, and every act which results in tax deduction, exemption of tax or not attracting tax authorised by the law, is to be treated as a device of tax avoidance ........"
In CWT v. Arvind Narottam (1988) 173 ITR 479 (SC), Hon'ble Justice Mukerjee has observed "where the true effect on the construction of deed is clear, as in this case, the appeal to discourage tax avoidance is not a relevant consideration. But it was made, it has to be noted and rejected". Hon'ble Supreme Court has, in the case of Azadi Bachao Andolan v. (2003) 263 ITR 706 (SC), approved the above views of the Hon'ble Gujarat High Court in Banyan & Berry's case (supra). Their Lordships then, inter alia, further observed that :
"If the court finds that notwithstanding a series of legal steps taken by an assessee, the intended legal result has not been achieved, the court might be justified in overlooking the intermediate steps, but it would not be possible for the court to treat the intervening steps as non est based upon some hypothetical assessment of the 'real motive' of the assessee. In our view, the court must deal with what is tangible in an objective manner and cannot afford to chase a will-o' the wisp."
In view of this discussion what is to be examined by us is whether the said sale transaction can be ignored on the ground that the impugned sale of shares is a make-believe transaction without there being any actual alienation of the shares in question. In case, however, the intended result, i.e., sale of shares, is found to have been achieved, it obviously cannot be open to revenue to disregard the transaction merely because the transaction ends up helping assessee minimise his tax liability.
9. The shares are transferred to Sameta Exports (P) Ltd. which is not only a separate artificial juridical person but also an entity in which the assessee does not have any stake or control. The fact that the transferee- company is de facto owned by close relatives of the assessee cannot alter the fact that transaction between the assessee and the Sameta Exports (P) Ltd. is transaction between two independent persons. There is also no allegation by the revenue that the consideration for sale is inadequate or improper. There is little dispute about the factual position that the shares are in fact worthless and these have been sold for a nominal consideration of Re 1 each share. This transaction may not have any commercial motive in the sense that nominal consideration of Re 1 each share cannot per se be a motive enough for the assessee to sell the shares but then, as the law appears to be fairly well settled, there is no bar on the assessee arranging his affairs in such a manner so as to minimise his tax liability. As Hon'ble Supreme Court has, in the case of Arvind Narottam (supra), observed "Where the true effect on the construction of deed is clear, as in this case, the appeal to discourage tax avoidance is not a relevant consideration". Accordingly, since we have come to the conclusion that the sale of shares of MML has in fact taken place and the same cannot be dubbed as "null and void", as the assessing officer has chosen to dub, it cannot be open to revenue to say that even though sale of shares has taken place, even though a, consideration of Re 1 per share cannot be said to be unreasonable or unfair, even though such a loss on sale of shares is indeed a 'long-term capital loss' under the scheme of the Act, the loss so incurred should not be allowed to be set off since it will encourage tax avoidance. In our understanding, a tax saving motive per se cannot turn a transaction into a colourable device, as long as there is no material difference between the real intention and the intention as discernible from the documents. However, as observed by a Special Bench of this Tribunal in the case of Mideast Portfolio Management v. Dy. CIT (2003) 87 ITD 537 (Mum-Trib)(SB), if the real intentions of the parties are discovered to be something different from the intentions professed in the documents, the Income Tax Authorities are at liberty to brand the same as subterfuge or a dubious device or a colourable transaction. However, in our view, there is no material before us to indicate that the shares were not intended to be sold to the transferee-company. In fact, even apart from the share transfer deed, there is an indemnity bond which demonstrates that benefits of the shares, despite restrictions on transfer due to company being under liquidation, were, in substance, transferred to the transferee-company. The only reason of revenue's objection to this transaction is that by giving recognition to this transaction, the assessee's tax liability will have to be substantially reduced. That is almost the same thing as appeal to discourage tax avoidance but then Honble Supreme Court itself, in Arvind Narottam's case (supra), does not consider it reason enough for invoking the principles laid down in McDowell's case. We respectfully follow the higher wisdom of the courts above. We are, therefore, of the view that the impugned transaction of sale of shares cannot be disregarded by putting the same in the category of 'colourable devices', even though we do appreciate that this transaction is prima facie with a motive to reduce the assessee's tax liability. It appears to us, in view of the discussions above, that 'motives' of a transaction are not really important but divergence of the true intentions vis-a-vis professed intentions of a transaction are really the determinative factor to examine a case on the touchstone of principles laid down in McDowell's case, In our considered view, revenue's case fails this test.
10. For the detailed reasons set out above, we approve the conclusions arrived at by the Commissioner (Appeals) and decline to interfere in the matter. We also place on record our appreciation for the learned representatives not only for their rendering the useful assistance but also for their patiently handling queries made by us during the course of hearing.
11. The appeal filed by the revenue is dismissed.