Income Tax Appellate Tribunal - Delhi
Arjun Malhotra vs Joint Commissioner Of Income Tax on 29 January, 2004
Equivalent citations: (2004)84TTJ(DELHI)269
ORDER
S.K. Yadav, J.M.
1. These appeals are preferred on behalf of the assessee assailing the order of the CIT(A) on various grounds. Since common issues are involved in these appeals, these were heard together and are being disposed of by this single consolidated order.
2. Ground Nos. 1 and 2 of appeal No. 1433 for asst. yr. 1998-99 and ground Nos. 1 to 4 of appeal No. 1434 for asst. yr, 1999-2000 relate to the capital gains earned on transfer of shares and eligibility of deductions in terms of provisions of Section 54F of the IT Act, 1961 against the purchase of new residential house.
3. Brief facts borne out from the record in nutshell are that the assessee has claimed to have received 1 lakh equity share of NIIT which were received by him as bonus shares. According to assessee, these shares were sold to M/s Glad Investments (P) Ltd. on 14th Aug., 1997, for Rs. 5 crores. Since these shares were received by the assessee as bonus shares, cost of these shares had been at nil and the total capital gains of Rs. 5 crore had been claimed as exempt under Section 54F of the IT Act on purchase of house at 5, Golf Links, New Delhi, for Rs. 10,25,75,000 on, 8th Aug., 1998 and as such, the taxable capital gains had been shown at nil. During the course of assessment proceedings, the AO discovered that these shares were, in fact, transferred to M/s Deutsche Bank, 15-17, Tolstoy Marg, New Delhi, as per the details given below:
No. of shares Transferee Date of Date of
Lodgement transfer
76,000 Deutsche Bank, 15-17, 22-8-1997 28-8-1997
Tolstoy Marg, New Delhi.
24,000 -do- 25-9-1997 29-9-1997
These shares were transferred to M/s Deutsche Bank as security for the loan given to M/s Glad Investments (P) Ltd., a family company of the assessee, by the bank and later on, these shares were subsequently transferred by the bank to M/s Glad Investments (P) Ltd., as per the details given below :
No. of shares Transferee Date of Transfer 76,000 Glad Investments (P) Ltd, 30-9-1998 24,000 -do- 30-9-1998
The above transactions were reported by M/s NIIT Ltd. in response to summons under Section 131 of the IT Act. On examination, the AO noticed that the NIIT records clearly indicate that shares in question were transferred by the assessee to M/s Deutsche Bank and not to Glad Investments in August, 1997.
4. In response to summons under Section 131 the Deutsche Bank vide letter dt. 17th March, 2001, has informed the AO that the shares were pledged by Shri Arjun Malhotra, the assessee, as security for a loan of Rs. 2 crore extended by the bank to M/s Glad Investments (P) Ltd. on 10th Sept., 1997. As value of shares was more than Rs. 5 lakh, the bank got the shares physically transferred to its name, which is a mandatory requirement as per the instructions of the RBI. The AO further noticed that these transactions were not made through any share brokers nor the same were recorded in the books of M/s Glad Investments (P) Ltd. as no balance sheet as on 31st March, 1998, was filed with the Registrar of Companies by Glad Investments. In the light of these facts, the AO worked out the capital gains at Rs. 14.93 crores and held it to be taxable in asst. yr. 1999-2000 and not in asst. yr. 1998-99. Accordingly, the proceedings under Section 147 for asst. yr. 1999-2000 for taxing these capital gains were initiated. Relevant observations of the AO for the sake of brevity are extracted hereunder:
"In view of all the circumstantial evidence gathered, it is a reasonable inference that the agreement to sell could not have been executed on 14th Aug., 1997 and the consideration mentioned in it is not the actual sale proceeds. The agreement to sell, as it is cannot form the basis of computation/assessment of capital gains for 1,00,000 NIIT shares transferred by assessee to Glad Investments, In case of a movable property, title to it passes with delivery in pursuance of an agreement to sell [CIT v. Bhurangya Coal Co. (1958) 34 ITR 802, 805 (SC)]. It may be remembered that the date of accrual of capital gains is the date when transfer takes place and the entries in the account books are irrelevant for the purpose of determining such date [Alpati Venkataramiah v. CIT (1965) 57 ITR 185 (SC)]. That a sale/transfer of 1,00,000 NIIT shares has taken place from assessee to Glad Investments is beyond doubt (as evidenced by change of ownership in NIIT records on 30th Sept., 1998). The date of 'sale' for the purpose of assessing capital gains is taken as 5th May, 1998, being the delivery date when the shares were released by M/s Deutsche Bank to Glad Investments (P) Ltd., as per instructions of Mr. Arjun Malhotra, being the earliest date of delivery, consideration and title transfer. As for the "full value of consideration" received/accrued to the assessee as a result of this transfer, the same is not known. The transaction is not a bona fide one as evident from the facts and circumstances discussed above in this order. What has actually been bargained as the price, in Kind or in cash between assessee and Glad Investments is not known. Glad Investments being a company under assessee's family control, there is no problem in receiving the consideration in future outside the books of accounts, in cash or in kind and thus evade the capital gains tax, As can be seen from para 5 of this order, Glad Investments has financed assessee's foreign trips without any apparent reason. There may be similar ways, in which Glad Investments has compensated the assessee for the shares of NIIT. There is no alternative but to estimate the consideration, as it is not possible to know as to how the consideration has actually passed or is yet to pass, in cash or in kind. The redemption amount of Rs. 5 crores cannot be the full value of consideration received, as this figure is part of the design of backdating the transaction. In a case like this, market price on the stock exchange would be the only option available to be adopted as 'full value of consideration received, being the realizable price by any prudent person by selling the shares on the stock exchange. As on 5th May, 1998, the market price of NIIT shares on NSE was Rs. 1,493 (as per letter dt. 19th March, 2001 of NIIT under Section 131). The capital gains, therefore, work out to Rs. 14,93 crores and are taxable in asst. yr, 1999-2000 and not asst. yr. 1998-99. Proceedings under Section 147 are underway for asst. yr. 1999-2000 for taxing these capital gain."
5. Though the AO has held that the capital gain is to be taxed in the asst. yr. 1999-2000 but he has dealt with the claim of deduction under Section 54F of the IT Act without prejudice to his observations with regard to the assessment year in which the capital gain is to be taxed. On this issue, the AO observed that the assessee was owner of another residential property at Mussoorie as on 14th Aug., 1997, when these shares were claimed to have been sold by the assessee. It was contended before the AO that the property Harnam Niwas and Sewa Kutir, Toolmaker Road/Sardar Harnam Singh Marg, Mussoori, is sold during financial year 1997-98 by the assessee to Mr. Sarabjeet Singh, Chandigarh. Copy of the sale deed filed on 7th March, 2001, shows that two sale deeds; one for Harnam Niwas and another for Sewa Kutir, were signed by the assessee in favour of Sardar Sarabjeet Singh on 24th Sept., 1997. The AO further observed that on the basis of the sale deed, the assessee was an owner of another residential property as on 14th Aug., 1997 and as per proviso below Section 54F, he was not eligible for deduction under Section 54F in respect of transfer of long-term capital asset as on 14th Aug., 1997. In response to these observations of the AO, the assessee has furnished the explanation that the assessee had sold the Mussoorie property on 20th July, 1997 and had handed over the possession of the property to the buyer on the same day. As such, he was not the owner of this residential house as on 14th Aug., 1997. The assessee has placed reliance on Sections 53A of the Transfer of Property Act r/w Section 2(47) of the IT Act according to which any transaction in which the possession of the property is handed over to the transferee and the transferee performs his part of contract, notwithstanding the fact of non-registration, transaction is recorded as transfer. On asking about proof of handing over the possession, the assessee's counsel has filed a copy of possession letter dt. 20th July, 1997, in which it has been stated that Mussoorie property is agreed to be sold by the assessee to Mr. Sarabjeet Singh for Rs. 4 lakhs and payment of Rs. 2 lakhs was made in advance and vacant possession of property was handed over to Mr. Sarabjeet Singh. The AO examined the sale deed and noticed that there was no mention of this agreement to sale-cum-possession letter in the final sale deed registered on 24th Sept., 1997. The sale deed refers to payment of Rs. 2 lakhs vide cheque dt. 20th July, 1997, but there is no mention about the sale-cum-possession letter in any place in the sale deed. The AO further observed from the statement of bank accounts and the extract filed explaining the entry in the bank account with the Mussoorie property that the sale proceeds got credited in the Indian Bank account of the assessee on 4th Aug., 1997 (Rs. 1,99,490) and 12th Sept., 1997 (Rs. 99,650). Since no payment was made on 20th July, 1997, handing over of possession on 20th July, 1997, without receiving any payment is not possible. The AO further observed that sale transaction date shown in the return of income for Mussoorie property was 12th April, .1997. Since the assessee could not place any other evidence except the aforesaid agreement of sale-cum-possession letter, the AO observed that the possession letter dt. 20th July, 1997, which was filed after the cropping up of condition in proviso to Section 54F cannot be taken as a proof of handing over possession on 20th July, 1997, with regard to Section 53A of the Transfer of Property Act. The AO observed that Section 53A of Transfer of Property Act, confers rights to the transferee against the possible eviction by the transfer or when he has performed part of obligation cast upon him by the agreement to sell. But this section does not vest complete rights, which an owner has, in the transferee. He, accordingly, held that the assessee was the owner of the Mussoorrie property as on 14th Aug., 1997 and hence was not eligible for exemption under Section 54F of the Act in respect of transfer of long-term capital asset on 14th Aug., 1997. The AO finally held that if at some stage of appeal, etc,, capital gain on sale of 1 lakh NIIT shares are held as having arisen on 14th Aug., 1997, the date shown by the assessee and hence taxable in financial year 1997-98, deduction under Section 54F is not to be allowed to the assessee in this year. Accordingly, the assessment for the asst, yr. 1999-2000 was reopened under Section 147 of the IT Act and the issue of long-term capital gain was further examined by the AO and in the light of close relationship between assessee and Glad Investments (P) Ltd, and non-filing of return/allotment of preferential shares in favour of the assessee by M/s Glad Investments (P) Ltd. before the RoC within the specified period, the AO held that the transaction of sale of shares took place during the financial year 1998-99 relevant to the asst. yr. 1999-2000 and he worked out the sale consideration of the shares on the basis of the rates of shares quoted on stock exchange as on 5th May, 1998 and worked out the capital gain and taxed the same in asst. yr. 1999-2000 after grant of deduction under Section 54F of the Act. The assessment order for both the years was challenged by the assessee through separate appeals before the CIT(A) and reiterated his contentions raised before the lower authorities but the fortune of the assessee did not fluctuate and the CIT(A) confirmed the assessment order.
6. Now, the assessee has preferred two separate appeals before the Tribunal.
7. The learned counsel for the assessee, Mr. M.S. Syali, senior advocate; with Mrs. Preeti Goel, advocate, raised two limbs of arguments during the course of hearing agitating the order of the CIT(A) for the asst. yr. 1998-99, Mr. Syali has submitted that the assessee had sold one lakh NIIT shares to M/s Glad Investments through an agreement to sell on 14th Aug., 1997 against a sale consideration of Rs. 5 crore at the market price quoted at the stock exchange. In lieu of sale proceeds, M/s Glad Investments has allotted Rs. 5 lakhs, 5 per cent non-cumulative preferential shares to the assessee on the same value of the sale consideration on 25th Aug., 1997, which were later on redeemed for Rs. 5 crores in succeeding assessment year. In support of the contention that the sale of shares took place as on 14th Aug., 1997, the learned counsel for the assessee has invited our attention to the sale agreement executed between the assessee and Glad Investments and the letter dt. 14th Aug., 1997, written by the assessee to Deutsche Bank in which Deutsche Bank was requested to release and transfer these shares directly in favour of Glad Investments (P) Ltd., once the loan secured against the pledge, of these shares is settled by Glad Investments. Since the assessee has agreed to sell these shares with M/s Glad Investments and the preferential shares were also allotted by Glad Investments in favour of the assessee against the sale consideration on 25th Aug., 1997, sale transaction was almost complete on execution of the sale agreement and allotment of preferential shares in favour of the assessee. Non-execution of a transfer deed does not take away the sale transaction out of this assessment year. In support of his contention, the learned counsel Mr. Syali has invited our attention to the definition of transfer in relation to the capital asset given in Section 2(47) of the IT Act according to which transfer in relation to a capital asset includes any transaction whether by way of becoming a member of or acquiring shares in, a co-operative society, company or AOP or by way of any agreement or any arrangement or in any other manner whatsoever which has the effect of transferring or enabling the enjoyment of, any immoveable property. He has also invited our attention to the fact that as per the directions of the assessee, the shares were duly transferred and released in favour of Glad Investments on 5th May, 1998 and in the financial year 1998-99, the assessee has purchased residential house at 5, Golf Links, New Delhi, for a sum of Rs. 1,00,75,000 on 8th Aug., 1998. As such, the assessee has rightly claimed exemption of the capital gain under Section 54F of the IT Act.
8. Mr. Syali, learned counsel for the assessee, further invited our attention to the finding with regard to the specific denial of exemption claimed under Section 54F of the IT Act on the ground that the assessee owned the residential house at Mussoorie on 14th Aug., 1997, when the shares were allegedly sold to M/s Glad Investments (P) Ltd. with the submission that the assessee has entered into an agreement with the buyer on 20th July, 1997 and received a payment of Rs. 2 lakhs through cheque and handed over the possession of the residential house to the buyer, though the sale deed of the impugned property was executed in the month of September, 1997. Since the possession of the residential house has been handed over to the buyer on 20th July, 1997, against certain receipts, the said property is deemed to have been sold as on 20th July, 1997, in view of definition of 'transfer' given in Section 2(47) of the IT Act and Section 53A of Transfer of Property Act. It means that the assessee did not own a residential house on the day when the shares were sold to Glad Investments as on 14th Aug., 1997. Since another residential house at Golf Links was purchased within a period of one year, the assessee has rightly claimed the exemption under Section 54F of the IT Act.
9. Learned counsel for the assessee, Mr. Syali, further raised a second limb of arguments with the submission that if the transfer of shares is not considered to be held within financial year 1997-98 relevant to the asst. yr. 1998-99 and is held to be undertaken in the asst. yr. 1999-2000 as done by the Revenue, even then assessee is entitled for the deduction under Section 54F of the IT Act. The main dispute would arise with regard to the sale consideration of 1 lakh shares of NIIT. Since the assessee has agreed to sell these shares with the Glad Investments (P) Ltd. vide its agreement dt. 14th Aug., 1997, at the prevailing market rate quoted at the Stock Exchange, for its total consideration of Rs. 5 crores and against which preferential shares were allotted to the assessee by Glad Investments, the same should be considered as sale consideration even if the shares are held to be transferred on 5th May, 1998, at the time of physical delivery of the shares during the asst. yr. 1999-2000. The value of the shares cannot be taken to be the same as quoted on the stock exchange as on 5th May, 1998, unless and until Revenue brings something on record to prove that the extra consideration over and above the agreed sale consideration was passed from M/s Glad Investments (P) Ltd. to the assessee. In support of this contention, Mr. Syali has heavily relied upon the judgment of the apex Court in the case of K.P. Varghese v. ITO and Anr. (1981) 131 ITR 597 (SC). Mr. Syali further assailed the orders of the lower authorities for the asst. yr. 1999-2000 with the submission that the Revenue authorities have adopted the notional value of NIIT shares at Rs. 14.93 crores without looking to the judgment of the apex Court in the case of K.P. Vaighese (supra).
10. The learned Departmental Representative, Mr. Sandeep Chaube, on the other hand, has strongly refuted the contentions of the assessee besides relying upon the order of the CIT(A). With regard to first issue whether the shares were sold and transferred to Glad Investments (P) Ltd, within the asst. yr. 1998-99, the learned Departmental Representative emphatically argued that the assessee and M/s Glad Investments (P) Ltd. are closely connected and whatever transaction took place, it was at arm's length. In support of his contention, he invited our attention to the fact that shareholdings of Glad Investments are held by Mrs, Kiran Malhotra, wife of the assessee and Poorva Malhotra and Shiven Malhotra, children of the assessee, Dr. Prabha Malhotra and M.C. Malhotra, parents of the assessee, Prabha Investment (P) Ltd., ATM System (P) Ltd. and Shiven Investment (P) Ltd. (all investment companies running from assessee's residence having cross-shareholdings of each other). Once it is established that transactions are performed between the closely connected parties and also at arm's length one should examine the nature and genuineness of the transaction very carefully. Mr. Choube has invited our attention to the agreement of sale of shares dt. 14th Aug., 1997, between the assessee and M/s Glad Investments (P) Ltd. through its director Shri M.C. Malhotra who is the father of the assessee. This agreement was not witnessed by any of the third parties. As per this agreement, the vendor shall sell and purchasers shall purchase the shares free from lien and encumbrances and with the benefit of accrued profit and with the right to all dividends and other distribution of whatsoever nature declared and all other rights attaching thereto. The sale consideration was fixed at Rs. 5 crores. It was also agreed that on signing of this agreement, vendor shall deliver to the purchaser the relevant share certificates and deliver to the purchaser duly executed instruments to transfer in favour of the purchaser in respect of the shares and do all acts, matters and things and execute such documents as may be required to enable the purchaser to be registered as absolute owner of the share. It was also agreed that upon signing of this agreement and delivery of shares, the purchasers shall allot 12.5 per cent preferential shares of the company to be redeemed at par at the discretion of the board. It was further agreed that as from the date of this agreement, the vendor shall hold the shares and all dividends and interest to accrue or accrued upon the same or any of them upon trust for the purchaser and agrees to pay and deal with the shares and the dividends and interest payable in respect of the same in such manner as the purchaser shall from time to time direct. In this agreement, nothing has been mentioned that the assessee has pledged the shares with the Deutsche Bank as a collateral security to advance the loan to Glad Investments (P) Ltd., though through its letter dt. 14th Aug., 1997, allegedly written by the assessee, he informed the Deutsche Bank that he had provided 1 lakh shares of NIIT shares as collateral security for grant of loan to Glad Investments and the shares were currently registered in the name of the bank. If this letter is read with this agreement, one would, find a contradictory statement of the assessee as, on the same day, assessee wrote .to the bank stating that shares were given to the bankers as a collateral security and the same were transferred in the name of the bank but, on the other hand, through this agreement, the assessee agreed to sell these shares to the Glad Investments with the specific narration that the shares are free from all lien and encumbrances and with the benefit of accrued profit and with right to all dividends. As per this sale agreement, the shares were required to be delivered to the purchaser i.e., Glad Investments (P) Ltd. on the date of signing of this agreement dt. 14th Aug., 1997. In the light of these facts, it is clear that this agreement was prepared by the parties with some ulterior motive. Without the delivery of these shares and execution of the transfer deed and also without receiving sale consideration, the sale of the shares cannot be completed. In response to various provisions of Sales of Goods Act, Mr. Choube has emphatically argued that nowhere it has been held that without effecting the delivery of the moveable property or without receiving the sale consideration, sale is deemed to have been completed. The learned Departmental Representative further invited our attention to the guarantee and memorandum of pledge by the third party with the submission that this memo was executed on 20th Aug., 1997 and according to this memo, the assessee has deposited the shares with the bank on 20th Aug., 1997. Once these shares were deposited and pledged with the bank on 20th Aug., 1997, how the assessee wrote a letter to the bank on 14th Aug., 1997, that he had provided 1 lakh shares as collateral security for grant of loan to Glad Investments and the said shares are currently registered in the name of the bank. The learned Departmental Representative further invited our attention to the letter dt. 17th March, 2001, written by Deutsche Bank to the Jt. CIT through which it has been stated that the shares were pledged by Shri Arjun Malhotra as security for a loan of Rs. 2 crores extended by the bank to M/s Glad Investments (P) Ltd. on 10th Sept., 1997. It means the delivery of the shares to the banks for its pledging was effected on 20th Aug., 1997 as per this memo and the shares were finally pledged on 10th Sept., 1997. If these shares were delivered to the bankers on 20th Aug., 1997, how the assessee can write a letter on 14th Aug., 1997, stating therein that he had furnished the collateral security of 1 lakh shares of NIIT to the bankers for grant of loan to Glad Investments and shares are currently registered in the name of the bank. It means this letter is prepared afterwards in order to prove that the sale of shares was effected within the asst. yr. 1998-99.
11. Learned Departmental Representative further contended with regard to the sale consideration that according to the assessee, the preferential shares with the value of Rs. 5 crores, a stipulated sale consideration, were allotted to the assessee even without taking the delivery of the shares though it was mandatory as per terms of agreement at 14th Aug., 1997, which were later on redeemed on 31st July, 1998. Though the assessee was required to furnish the statements/Form No. 2 stating the allotment of preferential shares with the Registrar of Companies within a month but it was not filed even during the entire financial year. Even the balance sheets of Glad Investments (P) Ltd. for the year ending 31st March, 1998, were not filed with the Registrar of Companies even upto the conclusion of assessment proceedings. All these facts led to an inference that no preferential shares were allotted to the assessee during the asst, yr. 1998-99 and the agreement for sale of shares between the assessee and Glad Investments is prepared with an ulterior motive to make out a case that the sale transaction of shares was undertaken during the financial year 1997-98 relevant to the asst. yr. 1998-99.
12. With reference to the letter dt. 14th Aug., 1997, written by the assessee to the Deutsche Bank, learned Departmental Representative, Mr. Choube, invited our attention that during the course of assessment proceedings, the AO has examined Mr. R.P. Verma, head of the loan administration of Deutsche bank but he could not state specifically whether this letter was received by the bank on 14th Aug., 1997. He, however, admitted that the letter was received before 5th May, 1998, when the shares were released by the bank and were transferred in the name of M/s Glad Investments (P) Ltd. He has also invited our attention to the copy of the letter filed before us that this letter does not bear the acknowledgement of the bank. As such, it cannot be held with certainty that this letter was, in fact, delivered to the bank on 14th Aug., 1997. Moreover, upto 14th Aug., 1997, when the shares were not pledged and delivered to the bank for their transfer in their name, there is no justification in writing a letter stating therein that the shares are provided to the bank as collateral security for grant of loan to Glad Investments and the shares are also currently registered in the name of the bank. When the shares were delivered and pledged with the bank on 20th Aug., 1997, how this letter was written stating therein that the shares were registered in the name of the bank. These facts clearly show that this letter was prepared again to bring out a case of transfer within the financial year 1997-98. Mr. Choube further contended that if all these facts are viewed collaterally/simultaneously, one would find that the assessee had concocted a story to bring out a case of transfer of shares during the financial year 1997-98 so that he can claim an exemption of capital gains under Section 54F of the Act on account of purchase of residential house at Golf Link Road for a sum of Rs. 10,00,75,000. In fact, the shares were transferred in the financial year 1998-99 relevant to the asst. yr. 1999-2000 as these were delivered and transferred in the name of Glad Investments by the bankers on clearance of the loan on 5th May, 1998. Since the shares were transferred on 5th May, 1998, the sale consideration of the shares should be worked out at the market rate as on 5th May, 1998, quoted on stock exchange and not at Rs. 5 crore as declared by the assessee. With reference to judgment of the apex Court in the case of K.P. Varghese (supra), Mr. Choubey has contended that whenever sale transaction is entered upon between two strangers, the sale consideration declared in the document shall be accepted to be the real value of the property unless and until the Revenue establishes that something extra over and above has been passed from the buyer to the seller. But when the sale transaction is undertaken at arm's length and the parties to the deeds are so closely connected with each other and the seller derives other benefits from the buyer on account of sale transaction, the value of the property of the sale consideration should not be accepted by the Revenue outrightly. They have a right to inquire the nature of transaction and if they collect evidence to doubt the sale consideration, they may adopt the market value of the property in order to determine the capital gains accrued to the seller. Mr. Sandeep Choubey, learned Departmental Representative, further contended that admittedly, Glad Investments (P) Ltd., the buyer, is controlled by the assessee's family, as major shareholdings were held by the wife, Mrs. Kiran Mahlotra, children of the assessee, i.e., Poorva Malhotra and Shiven Malhotra, parents of the assessee, Mrs. Prabha Malhotra and Mr. M.C. Malhotra, Poorva Investment (P) Ltd., AKM Systems (P) Ltd. and Shiven Investment (P) Ltd. (all investment companies are running from assessee's residence having cross-shareholdings of each other). Since the sale transaction was performed at arm's length, Revenue authorities were justified to examine the nature of transactions and to lift the corporate veil to ascertain the real state of affairs. Mr. Choubey has also invited our attention to the ledger account of the assessee in the books of Glad Investments which is appearing at page Nos. 24 to 25 of compilation of the assessee wherefrom it is quite evident that the assesses has been drawing a substantial amount from Glad Investments (P) Ltd., on one reason or the other. The Revenue has also brought out a case that the assessee has received consideration outside the books of accounts either in cash or kind to evade the capital gain tax. The AO has examined the foreign trips undertaken by the assessee and noticed that during the year, various trips to different countries were financed by Glad Investments (P) Ltd. Since the assessee has received certain consideration either in cash or in kind in future on account of sale of shares of M/s Glad Investments (P) Ltd. at a rate lesser than the prevailing rate, the Revenue authorities are justified in adopting the sale consideration at the prevailing market rate of shares quoted at the stock exchange and to work out the capital gain after allowing the deduction under Section 54F at Rs. 10,05,09,331 and tax the same in the asst. yr. 1999-2000.
13. Learned Departmental Representative further contended that although there is enormous evidence on record to establish that the sale transaction of shares was performed during the asst. yr. 1999-2000 but he intends to make comments on the point of deduction claimed under Section 54F of the IT Act in asst. yr. 1998-99. Mr. Choubey has invited our attention to the sale agreement-cum-possession letter with the submission that this sale agreement for the sale of residential house known as main building of Harnam Niwas and Swarn Kutir on Sardar Harnam Singh Road, Mussoorie, was neither executed on stamp paper nor attested by the marginal witness. As per the relevant provisions of the Registration Act applicable to U.P., every agreement for sale of immoveable property is required to be made on stamp paper of requisite value and this document is also required to be registered with the Sub-Registrar. As such, it is not admissible in evidence as per Evidence Act. He further invited our attention that this document is not attested by marginal witness. As such, it cannot be considered to be valid sale agreement of the immoveable property. He further contended that although it has been stated in this agreement that the assessee has received a cheque of Rs. 2 lakhs as an advance against the total sale consideration of Rs. 4 lakhs but this sale proceeds got credited in his account on 4th Aug., 1997, at Rs. 1,99,490 and on 12th Sept., 1997 of Rs. 99,650. It means that at the time of execution of the sale agreement, the possession was allegedly given to the buyer without taking any sale consideration. With reference to provisions of Section 53A of the Transfer of Property Act, Mr. Choube has contended that no doubt, this section gives protection to the buyer who takes possession of the immoveable property' on payment of total sale consideration but it does not give a right to claim rights in the property without making any payment of sale consideration. Mr. Choube has also commented on the definition of 'transfer' given in Section 2(47) of the IT Act that any transaction involving the handing over of possession of an immoveable property to the . buyer without payment of sale consideration does not take the colour of transfer defined in-aforesaid section. Clause V to Sub-section 2(47) is basically introduced to cover those sale transactions, which are performed on the basis of the sale agreement and power of attorney without getting sale deed executed and registered to save the registration expenses. Section 53A of the Transfer of Property Act can only be used as a shield and not as a sword as held by various High Courts in a series of judgments. The learned Departmental Representative further invited our attention to the sale deed dt. 24th day of September, 1997 with the submission that in the sale deed, payment of Rs. 1 lakh was made on 22nd Aug., 1997 and remaining payment of Rs. 70,000 was made on 24th Sept., 1997, on the day of the execution of the sale deed. In this sale deed, nothing has been stated about transfer of possession of the property. Had it been a fact that possession had been handed over to the buyer on 20th July, 1997, against the receipt of part of sale consideration, there would have been some narration to this effect in the sale deed. The other sale deed with regard to other property-main building of Harman Niwas-was not filed by the assessee. Since the onus is upon the assessee to prove that a sale of immoveable property was completed as per Section 53A of the Transfer of Property Act and buyer becomes the owner of the property, it was for him to bring some cogent material on record in support of his contention. Since the assessee has badly failed to establish that the residential house owned at Mussoorie was sold prior to the sale of shares, he is not entitled for an exemption under Section 54F of the IT Act. The learned Departmental Representative finally concluded that if this case is viewed from any angle, one would find that the assessee is not entitled for exemption under Section 54F of the IT Act in the asst. yr. 1998-99 and the Revenue is justified in determining the capital gain in 1999-2000 and taxing the same in that year.
14. Having considered the rival submissions and from a careful perusal of record, we find that admittedly, the assessee and Glad Investments, the so-called buyer, are closely connected with each other as the holding of shares of Glad Investments were held by the family members of the assessee and other investment companies which are controlled by the assessee and his family members. In the given facts and circumstances of the case, the main question posed before us is in which year, assessee has transferred its 1 lakh NIIT shares in favour of Glad Investments (P) Ltd. and what would be the sale consideration? If it is held that the sale of shares was effected in the financial year 1997-98 relevant to the asst. yr. 1998-99, whether the assessee is entitled for exemption of its capital gain earned under Section 54F of the IT Act on account of purchase of residential house at 5, Golf Link Road, New Delhi, for a sum of Rs. 10,75,00,000?
We, therefore, deal with the first question in which year, the sale of 1,00,000 NIIT shares is finally effected. The words 'sale' and 'agreement to sell have been defined in Section 4 of Sales of Goods Act, 1930 according to which where under a contract of the sale of property in the goods is transferred from the seller to the buyer, the contract is called a sale but where the transfer of property in the goods is to take place at a future time or subject to some condition thereafter to be fulfilled, the contract is called an agreement to sell. If the definition of sale is read with the definition of transfer given in Section 2(47) of the IT Act according to which the word 'transfer' includes any transaction (whether by way of becoming a member or acquiring shares in a co-operative society, a company or other association of members or by way of any agreement or arrangement or any other manner whatsoever) which has the .effect of transferring or enabling the enjoyment of, any immoveable property, we would find that for sale, the property in the goods (moveable) must be transferred from the seller to the buyer irrespective of the fact whether transferred documents are executed or not besides sale consideration. In the instant case, we would find that the assessee is mainly relying upon its two documents, one is sale agreement and the other is a letter written by the assessee to the bankers on 14th Aug., 1997. Through this agreement executed on 14th Aug., 1997, the assessee has sold its 1 lakh NIIT shares to Glad Investments (P) Ltd. Since the clauses of this agreement are quite relevant to decide the present controversy, whether these shares were, in fact, sold to M/s Glad Investments on 14th Aug., 1997, we feel it proper to reproduce this agreement, which helps us in adjudicating the controversy raised :
This agreement made this 14th day of August, 1997 between Mr. Arjun Malhotra s/o Shri M.C. Malhotra r/o 143, Golf Links, New Delhi (hereinafter called the vendor) on the first part and M/s Glad Investments (P) Ltd. having Registered office at 143, Golf Links, New Delhi-110045 through its Director Shri M.C. Malhotra (hereinafter called the purchaser) on the other part.
Whereas:
1. The vendor is the legal and beneficial owner of 1,00,000 equity shares of Rs. 10 each (hereinafter called shares) in NIIT Ltd.
2. The vendor and the purchaser have agreed to sell and purchase the shares, respectively for a total consideration of Rs. 5,00,00,000 (Rupees five crores only) in the manner hereinafter appearing.
3. The parties hereto have agreed that the beneficial interest in the shares, hall pass to the purchaser on the signing thereto.
Now it is hereby agreed as Mows :
1. The vendor shall sell and the Purchaser shall purchase the shares free from all lien and encumbrances and with the benefit of accrued profits and with the right to all dividends and other distribution of whatsoever nature declared and all other rights attaching thereto for the consideration hereinafter mentioned.
2. The consideration for the aforesaid sale and purchase of the shares shall be the sum of Rs. 5,00,00,000 (Rs. five crores only).
3. On the signing of this agreement the vendor shall deliver to the purchaser the relevant share certificates and deliver to the purchaser duly executed instruments to transfer in favour of the purchaser in respect of the shares and do all the other acts, matters and things and execute such documents as may be required to enable the purchaser to be registered as absolute owner of the shares.
4. Upon signing of this agreement and delivery of shares, the purchaser shall allot 12.5 per cent preference shares of the company to be redeemed at par at the discretion of the Board.
5. It is hereby further agreed and declared as follows :
(a) As from the date of this agreement, the vendor shall hold the shares and all dividends and interest accrued or to accrue upon the same or any of them upon trust for the purchaser and agrees to pay and deal with the shares and the dividends and interest payable in respect of the same in such manner as the purchaser shall from time to time direct.
(b) The vendor will be at the request of the purchaser attend all the meetings of the shareholders or otherwise which he shall be entitled to attend by the virtue of being the registered owner of the shares or any of them and will vote at every such meeting in such manner as the purchaser shall have previously directed in writing."
From a plain reading of this agreement, one would find that this agreement was signed and executed on 14th day of August, 1997 and by virtue of its Clause (iii), the assessee was required to deliver the share certificates along with duly executed instruments and to do all other acts and things and execute other documents as may be required to enable the purchaser to be registered as absolute owner of the shares. Once these shares were transferred and delivered to M/s Glad Investments (P) Ltd. by virtue of this agreement on 14th Aug., 1997, how the assessee retained the possession of the shares for pledging it with the Deutsche Bank, Tolstoy House as a collateral security for grant of loan of Rs. 2 crores to Glad Investments? A copy of this guarantee and memo of pledge is also filed before us by the learned counsel for the assessee and is appearing at page Nos. 12 to 14 of the compilation according to which the impugned shares were delivered and pledged with the bank on 20th Aug., 1997, besides other documents, which were finally transferred in the name of the bank and loan was advanced to M/s Glad Investments on 10th Sept., 1997,
15. We have also carefully examined the letter dt. 14th Aug., 1997, written by the assessee to the bankers and we find through this letter, the assessee has informed the bankers that he had provided 1 lakh shares of NIIT as collateral security for grant of loan to Glad Investments (P) Ltd. and the shares are currently registered in their name. He further requested the bankers to transfer these shares directly in favour of Glad Investments once the loan secured against the pledge of these shares is settled by Glad Investments, From reading this letter, an impression comes to our mind that as on 14th Aug., 1997, the assessee has already delivered the NIIT shares to the bankers as collateral security for grant of loan to Glad Investments and shares are registered in their name. But the facts borne out from the record tell a different story. On the one hand, the assessee informed the bankers that he has pledged the shares with them as collateral security and transferred in their name and, on the other hand, he entered into an agreement with Glad Investments (P) Ltd. to sell these shares on the same day and agreed to deliver the shares along with the duly executed document to facilitate the purchaser to get these shares transferred in their favour and also to become an absolute owner of the same. It is beyond our comprehension as to why the assessee has prepared two documents, one, a letter and the other agreement on the same day with a different statement of facts. The other important factor that the agreement is not attested by any marginal witness is also missing. It was executed on a plain paper and signed by the assessee and his father who is director of M/s Glad Investments (P) Ltd. From a careful examination of this letter and the agreement along with the guarantee and memorandum of pledge and the letter of Deutsche Bank written to the AO appearing at page No. 9 of the assessee's compilation, we failed to understand when these shares were delivered to the bank on 20th Aug., 1997, for its pledge and were transferred in the name of the bank on 10th Sept., 1997 how the assessee can write a letter to the bankers on 14th Aug., 1997 that it had provided 1 lakh shares of NIIT as collateral security for grant of loan to Glad Investments and the shares are currently transferred in the name of bank. During the course of assessment proceedings, the AO has examined Mr. R.P. Verma, head of loan administration, Deutsche Bank, to ascertain when this letter was filed with the bank but he could not tell specifically about the exact date, He simply admitted that it was filed before 5th May, 1998 when these shares were finally released and transferred in the name of M/s Glad Investments (P) Ltd.
16. Now, we come to next point of sale consideration of these shares received by the assessee and we would find from the sale agreement that on signing of this agreement and delivery of the shares, the purchaser shall allot 12.5 per cent preferential shares of the company to be redeemed at par at the discretion of the board, Though the agreement was signed on 14th Aug., 1997, but the shares were delivered to the purchaser on 5th May, 1998, as these were admittedly pledged with the bank on 20th Aug., 1997 and transferred in the name of bank on 10th Sept., 1997. As per this agreement, there was no question of allotment of preferential shares of the company in the name of the assessee till the delivery of shares. Though the assessee has taken a stand that the preferential shares were allotted to the assessee on 25th Aug., 1997, which were later on redeemed against the payment of Rs. 5 crores by Glad Investments to the assessee but the assessee could not place any evidence/on record to prove that the allotment of preferential shares was done on 25th Aug., 1997, except the book entries in their own record. According to Section 75 of the Companies Act, 1956 the assessee is required to file a return of allotment of shares stating their numbers, nominal amount of shares comprising the allotment, the names, addresses and occupation of the allottees, to the Registrar of Companies within 30 days but the assessee did not file the return even during the entire financial year. Even the balance sheet of Glad Investments ended on 31st March, 1998, was not filed with the Registrar of Companies upto completion of assessment, i.e., 7th March, 2001, though it was claimed to have been finalized on 1st Sept., 1998. The reasons for non-compliance of the mandatary requirement of the Registrar of Companies were not satisfactorily explained either before the lower authorities or before us. If all these facts are viewed simultaneously, only one conclusion would' be drawn that 1,00,000 NIIT shares were not sold by the assessee through this aforesaid agreement dt. 14th Aug., 1997 and these documents were prepared by the assessee with the intention to bring the sale transaction within the financial year 1997-98 relevant to the asst. yr. 1998-99 in order to claim deduction under Section 54F on account of purchase of residential house at Golf Link Road. We, therefore, constrained to hold that the shares were not transferred in asst. yr, 1998-99, but were transferred on 5th May, 1998, when the bankers have transferred them in favour of Glad Investments (P) Ltd. relevant to the asst. yr. 1999-2000.
17. Though it is not necessary for us to give a finding whether the assessee is entitled for exemption under Section 54F on account of purchase of house in Golf Links, New Delhi, in asst. yr. 1998-99, but we feel it proper to adjudicate the issue in the light of specific findings given by the lower authorities and arguments raised by both the parties. On a careful perusal, we find that the assessee owned a residential house in Mussoorie, which was allegedly sold by the assesse to Mr. Sarabjeet Singh for a total consideration of Rs. 4,00,000 on 20th July, 1997. On a careful perusal of this alleged agreement to sell, we find that this agreement was executed between the assessee and the buyer on a plain paper though it was required under the Registration Act applicable to U.P. that the agreement to sell of the immovable property should be executed on requisite stamp paper and be registered with the Registrar. This agreement to sell was not even attested by the marginal witness, though it is a requirement of law that all agreemeets should be attested by the marginal witness. As per the sale agreement the assessee has agreed to sell the property for a sale consideration of Rs. 4,00,000 and received Rs. 2,00,000 as advance money and delivered the possession to the buyer. But nothing has been brought on record on behalf of the assessee when this cheque of Rs. 2,00,000 was honoured, in the light of the facts that the sale-proceeds of Mussoorie property got credited in his bank account on 4th Aug., 1997 (Rs. 1,99,490) and on 12th Sept., 1997 (Rs. 99,650). It is very strange to note how the assessee has handed over the possession of his immovable property of Mussoorie house without receiving any part of the sale consideration on 20th July, 1997. During the course of the hearing the assessee has filed a copy of the sale deed, which was executed on 24th Sept., 1997, with respect to the house property known as "Swaran Kutir" with garage sold against a sale consideration of Rs. 1,70,000. The sale proceeds of this property was paid to the assessee through a cheque of Rs. 1,00,000 dt. 22nd Aug., 1997 and Rs. 70,000 in cash at the time of execution of the sale deed. In this entire sale deed, nothing has been stated about this agreement to sell-cum-possession letter nor was there any mention about the handing over of the physical possession of the property to the buyer on 20th July, 1997. The second sale deed of other property known as "main building of Harnam Niwas and kitchen" was not filed before us. Since the assessee has contended that it did not own any property on the day of transfer of shares, the onus is upon him to prove through some documentary evidence that his residential house was sold prior to the sale of shares on which he earned some capital gain. Except this alleged agreement to sell-cum-possession letter, nothing has been filed before us to substantiate that the Mussoorie property was sold. We have also carefully examined the provisions of Section 53A of the Transfer of Property Act and the definition of "transfer" given in Sub-section (47) of Section 2 of the IT Act and we find that one can claim a protection under Section 53A of the Transfer of Property Act if he gets the possession of the immovable property after fulfilling his obligations stipulated under the contract/agreement. It has been repeatedly held by various High Courts in series of judgments that Section 53A can only be used as a shield and not as- a sword. Under the garb of Section 53A of the T.P.A. one cannot claim the right of ownership in the immovable property. But for income-tax purpose in view of Section 2(47) of the IT Act, a transfer in relation of capital assets includes any transaction involving the allowing of a possession of an immovable property to be taken or retained in part performance of a contract of the nature referred to in Section 53A of the Transfer of Property Act, meaning thereby, for holding a valid transfer of immovable property without executing the registered sale deed there should be an un-conditional transfer of property and the buyer should have discharged the obligations cast upon him under the contract. If the transfer is conditional and the buyer has not discharged his complete obligations, there cannot be a valid transfer under the IT Act. In the instant case, if we accept for the sake of argument that the assessee has handed over the physical possession to the buyer on 20th July, 1997, but there is no evidence on record that the assessee has received any part of sale considerations on the day of handing over the possession. It is very un-natural that the seller can transfer the possession of the immovable property to the buyer even without receiving any advance money against a total sale consideration. We are unable to accept this explanation of the assessee that the possession was physically handed over to the buyer whereas there was no narration to this effect in the sale deed, which was executed later on nor was there any evidence that the assessee has received any part of sale consideration. We are, therefore, of the considered view that on the date of the alleged sale of shares, the assessee owned a residential house in Mussoorie and he is not entitled for exemption under Section 54F of the IT Act.
18. Once it is held that the shares were transferred in the asst. yr. 1999-2000, the next question comes, "what would be its sale consideration?" Having given a thoughtful consideration to the rival submissions on this issue, we are of the view that to determine the sale consideration of the NIIT shares, we have to revert back to the sale agreement of the shares dt. 14th Aug., 1997, according to which the assesse had agreed to sell 1,00,000 NIIT shares to M/s Glad Investments (P) Ltd. for a sum of Rs. 5 crores and the same was paid to the assessee in the form of allotment of preferential shares to the assessee, which would be, redeemed at par at the discretion of the board. This sale agreement has already been examined by us along with the other documents executed by the assessee in the foregoing paras and we finally held that these shares were not sold by the assessee through the aforesaid agreement dt. 14th Aug., 1997 and all these documents were prepared by the assessee with the intention to bring this sale transaction within the financial year 1997-98 relevant to the asst. yr. 1998-99, Once it has been held that this agreement is not a valid agreement, sale consideration of the shares cannot be determined on the basis of this agreement. In these circumstances, the sale consideration can only be determined on the basis of its market value when these shares were in fact sold and transferred in favour of Glad Investments (P) Ltd. It has already been held in the foregoing paras that the actual transfer of shares in favour of Glad Investments (P) Ltd. was effected only on 5th May, 1998, when the shares were transferred by the bankers in favour of Glad Investments (P) Ltd. As such, we have to determine the value of the sale consideration of 1,00,000 NIIT shares as on 5th May, 1998, Since the shares are quoted at the stock exchange, the rates of shares as on 5th May, 1998, should be adopted to work out the value of shares and its sale consideration. On perusal of the orders of the lower authorities, we find that the AO has adopted the rates of NIIT shares as on 5th May, 1998, as quoted on stock exchange.
19. We have also carefully examined the judgment of the apex Court in the case of K.P. Varghese (supra) and we find that the judgment was rendered in a context when the transaction was entered between the strangers and the genuineness of the transaction was not doubted and the dispute was with regard to the sale consideration. In those type of cases their Lordships of the apex Court have held that the onus is upon the Revenue to prove that over and above the sale consideration have passed from the buyer to the seller. But in the instant case the genuineness of the document on the basis of sale consideration claimed was doubted in the light of other documentary evidence of the assessee and it was finally held that the agreement to sell was not genuine documents on the basis of which sale consideration can be determined. Once this document is ignored, one has to work out the sale considerations on the basis of the market value. Moreover, in the instant case, it has already been held that the assessee and the buyer are closely connected and the transaction is (not) proved to be at arm's length. It is also evident from the record that the assessee has been drawing substantial amount from M/s Glad Investments (P) Ltd., on one reason or the other and he has also undertaken the foreign visits at the cost of the buyer, i.e., Glad Investments (P) Ltd. It means what has been shown as a sale consideration by the assessee is not the real consideration and in these circumstances only one option left with the AO to work out the real sale considerations is to adopt the market rate of shares as on the date of transfer, Since he has adopted the rates quoted at the stock exchange and worked out the capital gain, we find no infirmity in his action, which was later on approved by the CIT(A). Accordingly, these issues are decided against the assessee.
20. Ground No. 3 in appeal No. 1433/Del/2002 relates to the disallowance of Rs. 3,61,159 being the amount of foreign travel expenses incurred by Glad Investments (P) Ltd. We have heard the rival submissions and carefully perused the orders of the authorities below on this issue and documents placed on record, and we find that during the course of the assessment proceedings it was noticed by the AO that the assessee has undertaken certain foreign trips and he was asked to furnish the details in respect of trips undertaken during the year, specifying duration of each trip, place of visit, total expenditure on stay and travelling, purpose of each visit and as to who bore the expenditure. From the details it was noticed that the various trips were financed by M/s Glad Investments (P) Ltd., a company managed from the assessee's residence and the parents of the assessee and his wife and children are the directors. It was stated before the AO that the foreign tickets were purchased by M/s Glad Investments (P) Ltd. for the business purpose and during the period of foreign visit the assessee stayed with his friends and relatives. Since he did not spend anything from out of his pocket, no payment was made by Glad Investments (P) Ltd. Being not satisfied with the explanations of the assesses, the AO treated the foreign travel expenses at Rs. 3,61,159 as income of the assessee in terms of Section 2(24)(iv) of the IT Act.
21. The assessee preferred an appeal before the CIT(A) with the submission that the assessee has undertaken foreign trips for business purpose of Glad Investments (P) Ltd. with regard to tele-projects. Glad Investments (P) Ltd. was one of the promoters and it had entered into tele-project during the financial year 1996-97 along with HCL group and spent a sum of Rs. 36,79,308 on the same, The assessee had undertaken these trips on request of Glad Investments (P) Ltd. on tele-projects as such, these trips cannot be called to have been undertaken for the benefits of the assessee and it should be taxed as a perquisite in his hands. Since the assessee could not furnish any agreement in this regard with M/s Glad Investments (P) Ltd., the CIT(A) confirmed the addition. Now the assessee has preferred an appeal before the Tribunal and reiterated his contentions.
22. The learned Departmental Representative, on the other hand, has placed reliance upon the order of the CIT(A).
23. Having considered the rival submissions and from a careful perusal of the record, we find that while dealing with the issue with regard to the sale consideration of the shares, the Revenue has strongly argued that the assessee has acquired certain other benefits either in cash or in kind apart from the disclosed sale consideration of NIIT shares at Rs. 5 crores. While deciding the issue, we have agreed with the contentions of the Revenue and observed that the sale consideration of the shares should have been worked out at the rate of shares quoted at the stock exchange on the date of transfer. With respect to receipt of sale considerations we have also observed in the foregoing paras that the assessee had acquired certain benefits either in cash or in kind over and above the declared sale considerations of, Rs. 5 crores for which preferential shares were allotted to the assessee. In these circumstances the benefits enjoyed by the assessee, by undertaking the foreign trips at the cost of Glad Investments (P) Ltd. cannot be held to be separate income being a perquisite in the hands of the assessee. We, therefore, are of the opinion that no separate addition on this account is called for. Accordingly, we set aside the order of the CIT(A) and delete the addition.
24. Ground No. 4 relates to the addition of Rs. 50,000 for alleged unexplained expenditure incurred during the foreign trips. For the same reasons as explained in the foregoing paras, we find no justification in this addition. Accordingly, we set aside the order of the CIT(A) and deleted this addition.
25. Ground No. 5 relates to an addition of Rs. 19,801, which was added to the income of the assessee being a perquisite on account of security services. We have carefully examined the orders of the lower authorities on this count, but we do not find any infirmity therein. We, therefore, confirm the order of the CIT(A).
26. Ground Nos. 5 and 6 in ITA No. 1434/Del/2002 relate to the additions of Rs. 1,79,011 being amount of foreign travel expenses and Rs. 30,000 for alleged unexplained expenditure incurred during the foreign trips. These, additions were made by the AO on the ground that the foreign trips and expenditure were borne by M/s Glad Investments (P) Ltd., as such, the expenditure incurred should be added as a perquisite under Section 2(24)(iv) of the Act. Identical issues were examined by us in earlier appeal in the foregoing paras in which we have held that once it has been held that the assessee has received certain other benefits, besides the declared sale considerations, no further additions on account of expenditure borne by Glad Investments (P) Ltd. on foreign trips of the assessee are called for, Following these reasons, we find no justification in these additions and we, therefore, set aside the order of the CIT(A) and delete the addition.
27. In the result, both the appeals filed by the assessee are partly allowed: