Income Tax Appellate Tribunal - Ahmedabad
The Dy. Cit, Central Circle-2,, ... vs Anil R. Patel,, Vadodara on 11 April, 2022
आयकर अपील य अ धकरण, अहमदाबाद यायपीठ 'D' अहमदाबाद ।
IN THE INCOME TAX APPELLATE TRIBUNAL
"D" BENCH, AHMEDABAD
(Convened through Virtual Court)
BEFORE SHRI MAHAVIR PRASAD, JUDICIAL MEMEBR
& SHRI WASEEM AHMED, ACCOUNTANT MEMEBR
आयकर अपील (एस. एस.) सं./I.T(SS).A. No. 318/Ahd/2017
( नधा रण वष / Assessment Year : 2008-09)
The Dy. Commissioner of बनाम/ Smt. Seema Dalmia
Income-tax Vs. Block No. 14A, "UDAN",
Central Circle-2, Green Acres, Village
Room No.608, 6 t h Floor, Ampad, Tal. & Dis.:
Aayakar Bhavan, Race Baroda
Course Circle, Vadodara
थायी ले खा सं . /जीआइआर सं . /PAN/GIR No. : ACVPD2646J
(अपीलाथ /Appellant) .. ( यथ / Respondent)
&
आयकर अपील (एस. एस.) सं./I.T(SS).A. No. 319/Ahd/2017
( नधा रण वष / Assessment Year : 2008-09)
The Dy. Commissioner of बनाम/ Smt. Mita Anil Patel
Income-tax Vs. Plot No.8, R.S. No. 79,
Central Circle-2, Near Narmada Canal,
Room No.608, 6 t h Floor, Sevasi, Vadodara
Aayakar Bhavan, Race
Course Circle, Vadodara
थायी ले खा सं . /जीआइआर सं . /PAN/GIR No. : ACPPP2399J
(अपीलाथ /Appellant) .. ( यथ / Respondent)
&
IT(SS)A Nos. 318, 319, 321 & 322/Ahd/2017
(DCIT vs. Smt. Seema Dalmia & Ors.) -2-
आयकर अपील (एस. एस.) सं./I.T(SS).A. No. 321/Ahd/2017
( नधा रण वष / Assessment Year : 2008-09)
The Dy. Commissioner of बनाम/ Shri Anil R. Patel
Income-tax Vs. Plot No.8, R.S. No. 79,
Central Circle-2, Near Narmada Canal,
Room No.608, 6 t h Floor, Sevasi, Vadodara
Aayakar Bhavan, Race
Course Circle, Vadodara
थायी ले खा सं . /जीआइआर सं . /PAN/GIR No. : ADKPP1905E
(अपीलाथ /Appellant) .. ( यथ / Respondent)
&
आयकर अपील (एस. एस.) सं./I.T(SS).A. No. 322/Ahd/2017
( नधा रण वष / Assessment Year : 2008-09)
The Dy. Commissioner of बनाम/ Shri Atul Nandkishore
Income-tax Vs. Dalmia
Central Circle-2, Block No. 14A, "UDAN",
Room No.608, 6 t h Floor, Green Acres, Village
Aayakar Bhavan, Race Ampad, Tal. & Dis.:
Course Circle, Vadodara Baroda
थायी ले खा सं . /जीआइआर सं . /PAN/GIR No. : ABOPD1840Q
(अपीलाथ /Appellant) .. ( यथ / Respondent)
अपीलाथ ओर से/Appellant by : Shri Aarsi Prasad, CIT.D.R.
यथ क ओर से / Shri Milin Mehta, Shri
Bhavin Marfatiya, Shri
Respondent by :
Nirmit Mehta & Ms. Amrin
Pathan, A.Rs.
सन
ु वाई क तार!ख / Date of
08/03/2022
Hearing
घोषणा क तार!ख /Date of
11/04/2022
Pronouncement
IT(SS)A Nos. 318, 319, 321 & 322/Ahd/2017
(DCIT vs. Smt. Seema Dalmia & Ors.) -3-
ORDER
PER MAHAVIR PRASAD, JM:
The captioned four Revenue's appeals in case of four different assessees arise from the respective orders of the Commissioner of Income Tax (Appeals) ('CIT(A)') against different assessment years as tabulated below:
IT(SS)A Name of AY CIT(A)'s AO's AO's order
Nos. assessee order order under
dated dated Section
318/Ahd/17 Smt. Seema 2008- 21.03.17 29.12.17 153C
Dalmia 09 r.w.s.
153A
r.w.s.
143(3) of
the Income
Tax Act,
1961 (in
short 'the
Act')
319/Ahd/17 Smt. Mita 2008- -Do- 26.02.16 -Do-
Anil Patel 09
321/Ahd/17 Shri Anil R. 2008- -Do- 07.03.16 153A
Patel 09 r.w.s.
143(3) of
the Act
322/Ahd/17 Shri Atul 2008- -Do- 29.02.2016 -Do-
Nandkishore 09
Dalmia
2. Since, in all appeals facts & circumstances are common, therefore, for the sake of brevity, we would like to dispose of these matters by way of a common order. IT(SS)A No. 322/Ahd/2017 in case of Shri Atul N. Dalmia is taken as lead case for disposal of the above appeals.
IT(SS)A Nos. 318, 319, 321 & 322/Ahd/2017 (DCIT vs. Smt. Seema Dalmia & Ors.) -4-
3. The ground of appeal raised by Revenue in IT(SS)A No. 322/Ahd/2017 in case of Shri Atul N. Dalmia read as under:
1. (a) On the facts and circumstances of the case and in law, the Ld. CIT(A)-12, Ahmedabad has erred in deleting the entire addition to the tune of Rs. 11,62,69,9077-. The addition was based on the seized e-mail conversations.
Hence, the addition has erroneously been deleted by the Ld. CIT(A)-12, Ahmedabad.
(b) The Ld. CIT(A)-12, Ahmedaba'd has erred in deleting the addition on account of considering sale of 100% shares of RLL to M/s Lupin Ltd. as 'Business Income' and considered it as Income from 'Capital Gains'. The same is erroneous as this is not merely transfer of the shares of a company but the 'lock, stock and barrel' sale with a non- compete and non-solicit clause in the Article 9 of the SPA, which clearly attracts the provisions u/s 28(va). Hence, the Ld. C1T(A)-12, Ahmedabad has erroneously treated the same as Income under the head 'Capital Gains', instead of 'Business Income'.
(c) The Ld. CIT(A)-12, Ahmedabad has erred in considering that there is no incriminating material found in the search, for assuming jurisdiction by the AO. There is a hugely incriminating material found in the form of e- mails(when compared with Share Purchase Agreement). Hence, the Ld. CIT(A)-12, Ahmedabad has erroneously concluded that there is no incriminating material found,, for assuming jurisdiction by the AO.
2. On the facts and circumstances of the case and in law, the Ld. CIT(A)-12, Ahmedabad has erred in deleting the entire addition of Rs. 34,59,55,100/-. The addition was based on the evidences found during the course of search, which clearly shows that Shri Atul N Dalmia and Shri Anil R Patel have created subterfuge transactions to avoid payment of taxes. Hence, the addition has erroneously been deleted by the Ld. CIT(A)-12, Ahmedabad.
3. (a) On the facts and circumstances of the case and in law, the Ld. CIT(A)-12,Ahmedabad has erred in deleting the entire addition of Rs. 3,45,20,508/-. The addition was based on the evidences found during the course of search, which clearly shows that Shri Atul N Dalmia has also sold his shareholdings to Lupin Ltd. at the rate of Rs. 154.37 per share, neither the conditions preceding the transfer of shares by Shri Anil R Patel to Shri Atul N Dalmia nor the conditions succeeding the transfer of shares justify the value at which the shares have been transferred by Shri Anil R IT(SS)A Nos. 318, 319, 321 & 322/Ahd/2017 (DCIT vs. Smt. Seema Dalmia & Ors.) -5- Patel to Atul N Dalmia at the rate of Re.l per share. Hence, the addition has erroneously been deleted by the Ld. CITf(A)-12, Ahmedabad.
(b) The Ld. CIT(A)-12, Ahmedabad has erred in considering that there is no incriminating material found in the search, for assuming jurisdiction by the AO. There is a hugely incriminating material found in the form of e- mails(when compared with Share Purchase Agreement). Hence, the Ld. CIT(A)-12, Ahmedabad has erroneously concluded that there is no incriminating material found,, for assuming jurisdiction by the AO."
4. With regard to issues under consideration, the AO observed as under:
5. Difference of Rs. 5,68,61,048/- in sale consideration of Rubamin Laboratories Limited-
5.1 During the course of assessment proceedings, it was observed that assessee has sold 6,52,432 shares of Rubamin Laboratories limited to Lupin Limited and has shown the sale consideration of Rs.7,02,99,053/-. The total capital gain shown is of Rs,6,55,91,422/-. Out of this amount, assessee has claimed exemption u/s 54 of the Act of Rs 6,09,82,053/- (54EC Rs.50,00,000 + 54F 5,59,82,053) and the capital gain offered for taxation before claiming set off is of Rs. 46,09,369/- and after set off the capital gain offered for taxation is of Rs. 9,91,462/- After the verification of submission of assessee and the seized material, assessee was issued show cause notice dated 15.01.2016, relevant portion is as under :
".............
5. On the perusal of seized material (AnnexureA-7)(Hard Disk Information) seized from the office of Rubamin Limited, Synergy House, IT(SS)A Nos. 318, 319, 321 & 322/Ahd/2017 (DCIT vs. Smt. Seema Dalmia & Ors.) -6- Baroda, an offer letter from Lupin Pharma dated 28.08.2007 has been found and seized. This offer letter has been duly signed by the representative of Lupin Limited, Shri Ramesh Swaminathan (President, Finance and Planning Lupin Limited). As per this letter, Lupin Limited had made an offer amounting to Rs 42,50,00,000/- for acquiring 100% fully paid up equity share capital of Rubamin Laboratories limited .. Further on going through various mails exchanged between Shri Atul Dalmia and various finance department heads of Rubamin Limited, it is seen that along with Lupin there were other offers for the same transaction from other parties the value of which is ranging between 44 to 45 crore. Thus there is no human probability that the directors of Rubamin will accept an offer at such a lower price of Rs 36.81 crore. Thus when Lupin itself has made offer for Rs 42,50,00,000/- , then there is no reason why the real agreement would be done at a price lower than that .Thus it is seen that Lupin has paid a total amount ofRs 42,50,00,000/- as purchase consideration for the purchase of 100% shareholding alongwith the Business on a going concern. Hence there is suppression of business receipts (Rs 42,50,00,000- Rs 36,8l,38,952/-) to the tune of Rs 5,68,61,048/- by the sellers on the sale of shares and business of the company Rubamin Laboratories Limited. Thus you are requested to show cause why the unaccounted receipts of Rs 5,68,61,048/- in proportion of your shareholding in the company should not be added to your income and taxed in your hands as undisclosed receipts.
...........
..........."
5.2 In response to the same, assessee has furnished its reply dated 01.02.2016. The main contentions raised by the assessee are as follows:
a. Assessee has mainly contended that with respect to A.Y.2008-09, the assessment proceedings have been deemed completed under section 143(1) of the I T Act and hence the scope of assessment would be limited to incriminating material itself.
b. Further with respect to the issue of difference in sale consideration, assessee has stated that the offer of Rs 42.50 crore was subject to some adjustments and hence the final deed IT(SS)A Nos. 318, 319, 321 & 322/Ahd/2017 (DCIT vs. Smt. Seema Dalmia & Ors.) -7- was done only at Rs 36.81 crore thus there is no suppression of income.
5.3 This office has carefully perused the arguments given by the assessee but they are not acceptable for following reasons:
5.3.1 Rebuttal of objection at point a:
1. With respect to first objection regarding scope of assessment, it is to be noted that in the entire scheme of section 153A of the Act, there is no prohibition for the assessing authority to restrict the enquiry to incriminating material itself. It is expressly provided u/s 153A of the Act that the AO shall assess or reassess the "total Income"
of the six assessment years . For clarity section 153A is reproduced herewith as follows:
"153A(1) Notwithstanding anything contained in section 139, section 147, person where a search is initiated under section 132 or books of account, other documents or any assets are requisitioned under section 132A after the 31st day of May, 2003, the Assessing Officer shall -
(a) issue notice to such person requiring him to furnish within such period, as may be specified in the notice, the return of income in respect of each assessment year falling within six assessment years referred to in clause (b), in the prescribed form and verified in the prescribed manner and setting forth such other particulars as may be prescribed and the provisions of this Act shall, so far as may be, apply accordingly as if such return were a return required to be furnished under section 139;
(b) assessee or reassess the total income of six assessment years immediately preceding the assessment year relevant to the previous year in IT(SS)A Nos. 318, 319, 321 & 322/Ahd/2017 (DCIT vs. Smt. Seema Dalmia & Ors.) -8-
which such search is conducted or requisition is made : "
2. Thus under the provisions of section 153A, the assessing officer is bound to issue notice to the assessee to furnish returns for each assessment year falling within the six assessment years immediately preceding the assessment year relevant to previous year in which search was made. Another significant feature of this section is that the AO is empowered to assess or reassess the Total income of the aforesaid years. Thus wording of the section is very clear and there is no ambiguity „ Act has clearly required assessee to furnish the return for all the six assessment years whether incriminating material has been found or not. Further act has specifically requires the AO to assess or reassess the total income of six assessment years. Had the intention of Act been to restrict the scope of assessment only for those years for which some material has been found, act would have mentioned that in the proviso. Thus act clearly states that assessment or reassessment has to be done for all the six years. When there is no ambiguity in the wording of the act, there is no need to interpret the section in different way.
3. Again the proviso to section 153A clearly states that total income of the six assessment years has to be assessed. Had the intention of the act has been to restrict the scope to the incriminating material found, act would have mentioned so in the provisos. But here again section is very clear that for 153A assessments have to be made in totality . The AO IT(SS)A Nos. 318, 319, 321 & 322/Ahd/2017 (DCIT vs. Smt. Seema Dalmia & Ors.) -9- shall assess the total income of six assessment years which means the said total income includes income which was returned in the earlier return, the income which was unearthed during search and the income which was not the subject matter of aforesaid two incomes.
Thus here again when the section says in clear language that total income has to be assessed , no different interpretation can be attached to it.
4. The objection of the assessee that only pending assessment shall abate and completed assessments will not be disturbed is also not in line with the section itself. Further this can be specifically understood when we compare this with earlier block assessment schemes under section 158BC. Block assessment proceeding would lead to one block assessment for undisclosed income and regular assessment were preserved resulting into multiple assessments. Section 153A has been introduced to withdraw multiple assessments and hence the power is given to AO to decide total income of the assessee under one assessment order for 1 year.. As under 153A , there is no room for multiple assessments, the provision has been made that pending assessment will be abated i.e. it will be merged to search assessment for the determination of total income as only one order has to be passed for disclosed and undisclosed income. With respect to completed assessment they will be reassessed as the section 153A asks AO to assess or reassess the total income. That's why IT(SS)A Nos. 318, 319, 321 & 322/Ahd/2017 (DCIT vs. Smt. Seema Dalmia & Ors.) - 10 -
the word reassess has been introduced in the section for completed assessments.
5. A perusal of section 153A shows that it starts with a non obstante clause relating to normal assessment procedure which is covered by sections 139, 147, 148, 151 and 153 . These sections applicability of which has been excluded relate to returns, assessments and reassessment provisions. So if an order is already in existence u/s 143(3)/ 143(1) having obviously been passed prior to the initiation of search, the assessing officer is empowered to reopen those proceedings and reassess the total income, taking note of the unearthed income, if any, during the search. For this purpose the fetters imposed upon the Assessing officer by the strict procedure to assume jurisdiction to reopen assessment under section 147 and 148 have been removed by the non obstente clause with which subsection (1) of section 153A opens. The time limit to reopen the assessment or time limit for completion of assessment or the procedure for reopening as prescribed u/s!47, 149 and 151 , 153 has been done away with in a case covered by section 153A. Thus as per going by the provisions in section 153A , assessing officer under section 153A has been entrusted to assess or reassess the total income of assessee for all six years, without following any procedure that might be required under section 147, 139, 148 , 151 or
153.
6. Reference is also invited to the following case laws:
IT(SS)A Nos. 318, 319, 321 & 322/Ahd/2017 (DCIT vs. Smt. Seema Dalmia & Ors.) - 11 -
CIT vs Anil Kumar Bhatia on 7th August 2012( Delhi High Court) Canara Housing Development Company vs DCIT( Karnataka High Court) The HonlDle Ahmedabad Tribunal in the case of Dr. Mansukh Kanjibhai Shah v.
ACIT(129 ITD 376) has held that once the
warrant of authorization or requisition is issued and
search is conducted 85 Panchanama is drawn, all the relevant six assessment years would get reopened irrespective of any incriminating material is found or not in respect of any particular assessment year falling within the relevant six assessment years.
7. Without prejudice to the above facts, it is stated that the above objections as stated by assessee are not applicable to the case of his as the incriminating material has been found and related to the above issue. During the course of search various incriminating documents have been found from the hard disk which was found and seized from the premises at Rubamin Limited, Synergy House, Baroda, annexed as Annexure A-10. These documents are in the nature of various mails exchanged between Shri Atul Dalmia and various heads of Rubamin . The transaction mentioned in the mail is related to transfer of shares of Rubamin Laboratories Llimited. Further an offer letter from Finance head of Lupin has also been found and inventorised in Annexure A-7(Hard Disk Information) which has bearing on the determination of income on this issue. Now these documents which were found during the search were not available .when the assessment order u/s IT(SS)A Nos. 318, 319, 321 & 322/Ahd/2017 (DCIT vs. Smt. Seema Dalmia & Ors.) - 12 -
143(1) of the I T Act was passed. Hence the arguments of the assessee on this count are also not valid. The details of incriminating material found related to assessee has been discussed in the following paragraphs.
5.3.2 Rebuttal of objection at point b :
1. During the course of search on perusal of seized material (Annexure A-7) (Hard Disk Information) seized from the office of Rubamin Limited, Synergy House, Baroda, an offer letter has been found and seized. For clarity the copy of offer letter is reproduced in assessment order.
2. This offer letter has been duly signed by the representative of Lupin Limited, Shri Ramesh Swaminathan(President, Finance and Planning Lupin Limited).As per this letter, Lupin Limited has made an offer amounting to Rs.42,50,00000/-for acquiring 100% fully paid up share capital alongwith business of Rubamin Laboratories Limited. The above letter is also agreed, accepted and signed by Shri Atul Dalmia. As per the submission of assessee, it is mentioned that offer made 'in the offer letter of Rs 42.50 crore was subject to adjustments as mentioned in para 2 of the said offer letter. The details of adjustments made to initial offer as mentioned by assessee are as follows:
Consideration as per offer: 4250.00 lacs
Adjustments:
Bad inventory 309.601acs
IT(SS)A Nos. 318, 319, 321 & 322/Ahd/2017
(DCIT vs. Smt. Seema Dalmia & Ors.) - 13 -
Loss 104.001acs
Land 70.00lacs
Fees to Yes Bank 85.001acs
Total 568.60
Sale consideration as per agreement 3681.401acs . 3. This office has verified the submission of assessee but could not find force in it. Firstly it is to be noted that though offer letter mentions about some adjustments, it is nowhere quantified by it. W.r.t issue of inventory in this regard, it is submitted that as per para 2 of this offer letter it is mentioned that "in any case, if any such working capital related to assets are not paid by the buyer(i.e Lupin) at the time of transaction but are subsequently recovered through best efforts of the buyer, the proceeds will be given to sellers . Therefore sale proceeds of the working capital or inventories shall be over and above the purchase consideration fixed of Rs 42,50,00,000/- as per the offer letter dated 28th August 2007. Thus purchase consideration is Rs 42,50,00,000/- and value of inventory is over and above the same.
4. Further it is to be mentioned that the adjustments on account of land and fees to yes bank have neither been mentioned in offer letter nor in final agreement. But with respect to land as per para 2(vi) of the offer letter, it is mentioned that Rubamin has clear title and ownership to all part and parcel of land admeasuring approximately 30 acres, on part of which Rubamin has present IT(SS)A Nos. 318, 319, 321 & 322/Ahd/2017 (DCIT vs. Smt. Seema Dalmia & Ors.) - 14 -
manufacturing activity. The cost for clear title has to borne by promoters. Thus the land cost has no bearing on the offer made of Rs 42.50 crore. Further para 4 of the offer letter mentions that Rubamin will facilitate the purchase of adjacent land about 10 acres. But it has no bearing on the transaction under discussion. It means that promoters have received the extra consideration for facilitating the transaction of land discussed above and the offer of 42.5 crore does not include the consideration for this facility. So there is no force in the argument of assessee that 70 lacs have to be reduced from the offer value.
5. With respect to fees to Yes Bank, it nowhere finds mention in the offer letter. As per the oral discussion with A.R of the assessee, it was submitted that payment to Yes Bank was made as a commission for facilitating the transfer of this transaction. But no proof in this regard is submitted. Further offer letter nowhere mentions adjustment on account of commission payments.
6. Most importantly it is submitted that some mails exchanged between Shri Vikas Dawra, Atul Dalmia and Ajay Agarwal have been found from the premises of Rubamin Limited, Synergy House, Baroda. The copy of these mails are also reproduced in assessment order.
From the mails, it is observed by the AO that offers and deliberations made through mail are related to sale of the IT(SS)A Nos. 318, 319, 321 & 322/Ahd/2017 (DCIT vs. Smt. Seema Dalmia & Ors.) - 15 -
business of Rubamin Laboratories Limited(RLL). Assessee has submitted that these are not relevant mails. But it can be seen that the discussion in these mails is with respect to sale of Rubamin Laboratory itself. First mail is from Shri Atul Dalmia to Shri Vikas Dawra dated 09.08.2007which states that the valuation will conclude to Rs. 45 crore. Second mail is dated 13.08.2007 i.e in the period when Rubamin was in the process of sale of Rubamin Laboratories Ltd. and was evaluating various offers. In this mail, Shri Atul Dalmia has stated to Vikas Dawra, who is from Investment banking in Yes bank that as per his calculation Rs 45 crore plus 15 crore will be good valuation . The mail also mentions about Lupin offer. So there is no force in assessee's argument that this mail is not related to sale of RLL. Further mail between Atul Dalmia and Ajay Agarwal dated 16th August 2007 is also related to the same issue. Shri Ajay Agarwal was the CFO of Rubamin during that period and Khanna is some person from Lupin with whom the talks in this matter are going on. The subject of the mail is Lupin. It contains the draft of agreement with Lupin. In the same mail it is mentioned that Khanna has come upto 44 and pleading Vikas not to insist for 45. Thus it means that the offer from Lupin has come for Rs 44 crore as mentioned in the mail. Thus from the discussion, it is clear that all the mails are related to transaction of sale of Rubamin Laboratories Limited. These are certainly the incriminating mails which depict the true offers made and the deliberations on these issues.
IT(SS)A Nos. 318, 319, 321 & 322/Ahd/2017 (DCIT vs. Smt. Seema Dalmia & Ors.) - 16 -
7. Thus on going through the seized material it is found that the offer for sale of Rubamin has come upto 44 crore. Lupin itself has made the offer for Rs.44 crore as per the mail attached above. Thus, it can be said that Lupin has initially made offer for Rs. 44 crore and after certain adjustment, the official offer was made of Rs. 42.5 crore which was also accepted by Rubamin.
8. Thus on the basis of above discussion, it is held that the actual consideration received from the Lupin is that of Rs 42.50 crore. Thus value of share comes to Rsl78.21/share. The assessee was in possession of 6,52,432 shares which were sold to Lupin alongwith business of the company at the rate of Rs 178.21/share. Thus the consideration received is of Rs.11,62,69,907/- from the sale of 6,52,432 shares at the price of Rs.178.21/- per share instead of Rs. 7,02,99,053/- as shown by the assessee. Thus there is difference of Rs.4,59,70,854/- and suppression of income to that extent. Penalty proceedings u/s 271(1)(c) of the Act are being initiated separately for concealment of income.
6. Issue of Capital gain vs Business Income 6.1 On verification of share purchase agreement between sellers and Lupin Ltd, it was observed by the AO that Lupin has acquired the shareholding of company alongwith entire business as a going concern. Thus, assessee was issued show cause notice dated 15.01.2016, relevant portion is as follows :
IT(SS)A Nos. 318, 319, 321 & 322/Ahd/2017 (DCIT vs. Smt. Seema Dalmia & Ors.) - 17 -
"...............
5. Further on verification of Share Purchase agreement between sellers and Lupin Ltd, it is seen that there are various clauses which elaborate the fact that Lupin has acquired the shareholding of company alongwith the entire business of the company , Rubamin Laboratories Limited . On going through various clauses, it is seen that through this agreement Lupin Pharma has acquired the business of the company i.e. business of manufacture , marketing, distribution and sale of fine chemical, API and intermediaries used in Pharmaceutical industry on a going concern basis with the entire shareholding of the company . Thus it is seen that entire control and management over the business and the company has been transferred by the sellers to the purchaser i.e. Lupin Pharma. Thus you are requested to show cause why the total consideration received by you on transfer of shareholding alongwith business of Rubamin Laboratories Limited should not be considered as business receipts and gain arising thereon should not be considered as income from business rather than capital gain as shown by you in your return of income. ............
.............."
6.2 In response to the same, assessee has furnished his reply dated 01.02.2016. On this issue, assessee has again raised similar objections with reference to scope of 153 assessment. The detailed reply to those objections has already been made in the first issue. Hence the same arguments are not repeated. Other than the above assessee has raised objection that the shares were held as investment since inception, assessee has received dividends from the same and were classified as such in the books of accounts. Before going into the objections of assessee, it is necessary to verify facts of the case which are as follows:
1. Lupin Pharmaceuteals Limited purchased 100% of the current issue and paid up capital of the company free of all encumbrances, alongwith the business of the company as a going concern , on the terms and conditions and in the manner set out in the agreement as per Clause D of the IT(SS)A Nos. 318, 319, 321 & 322/Ahd/2017 (DCIT vs. Smt. Seema Dalmia & Ors.) - 18 -
Share Purchase Agreement dated 26th September 2007 duly signed by the purchaser and the sellers and the company.
2. It is mentioned in the Clause B of the Agreement that the sellers [Shri Atul N Dalmia, Shri Anil R Patel and persons set out in Annexure 1A, acting through their constituted attorney Mr. Shri Atul N Dalmia] are the legal and beneficial owners of 23,84,783 share (hereafter defined) which represent 100% of the current issued and paid up share capital of the company, more particularly described in Annexure 1 hereto.
3. Further 'Business" has been defined under Article 1.1.4 as the business of manufacture, marketing, distribution and sale of fine chemicals, API and intermediates used in the pharmaceutical industry.
4. "Transaction" has been defined in Article 1.1.2 to mean the sale of the shares comprising the entire shareholding of the company by the sellers to the purchaser and the purchase thereof by the purchaser from the sellers along with the Business at and for the Purchase Consideration in accordance with the terms set out in this Agreement.
Further there are various clauses mentioned below which further elaborates the fact that Lupin has acquired the shareholding of the company along with the entire business of the company; Rubamin Laboratories Ltd.
5. Article 2.1 & 2.2: sale and purchase of the shares it is mentioned that the Purchase Consideration shall include consideration for the transfer and assignment of the business as a going concerns, goodwill, intellectual property right, in relation to the business or otherwise owned or used by the company to the purchaser in the manner set out herein. Therefore the purchase consideration of Rs. 154.37 per share comprises the payments made for the purchase of shares and the purchase of business on a going concern.
6. On perusal of Article 9 as mentioned in the Agreement, it is clearly evident that Lupin Pharma has paid the Purchase Consideration for the non-compete and non solicit clauses as enshrined in the Agreement. Clause 9.1.1 states that sellers will not directly or indirectly engage in any business activity which competes with the business of the company. Clause 9.1.2 states that sellers being key promoters are in possession of trade secrets and confidential information of the business of the company thus they will not render any services as employer or consultant in any business similar IT(SS)A Nos. 318, 319, 321 & 322/Ahd/2017 (DCIT vs. Smt. Seema Dalmia & Ors.) - 19 -
to business of the company. Further it puts restrictions on sellers to participate in the management of the similar company or having investment in the business Further 9.2 contains non solicit clauses. The clause 9.2.1 puts restriction on promoters interfere with , to induce any senior executive employee or use the services of any employee who is under contract of the company. Further it restricts promoters to solicit from company any contract , or interfere in any project or induce any client from offering similar services. Thus these are the important clauses which require promoters to not carry out any activity in relation to similar line of business and further it restricts them from sharing any know how , product information, client details, etc. In addition the sellers have allowed Lupin Pharma to use the office premises, accounting software and the name of "Rubamin" as mentioned under Article 10 "Shared Services".
Thus On the basis of above mentioned definition of important clauses enshrined in the Share Purchase Agreement dated 26th September 2007, it can be clearly concluded without any ambiguity that Lupin has acquired the entire shareholding of the company i.e. 23,84,783 shares which represent 100% of the current issued and paid up share capital of the company, free of all encumbrances, along with the Business of the company as a going concern. Therefore, through this Agreement, Lupin Pharma has acquired the Business of the company i.e. the business of manufacture, marketing, distribution and sale of fine chemicals, API and intermediates used in Pharmaceutical industry on a going concern basis along with the entire shareholding of the company. Further, it has been noticed that the company acquired by Lupin continued to function after its acquisition.
6.3 In this background, section 28(va) becomes applicable as follows:
"Profits and gains of business or profession.
28. The following income shall be chargeable to income-tax under the head "Profits and gains of business or profession",--
[(va) any sum, whether received or receivable, in cash or kind, under an agreement for-
(a) not carrying out any activity in relation to any business; or IT(SS)A Nos. 318, 319, 321 & 322/Ahd/2017 (DCIT vs. Smt. Seema Dalmia & Ors.) - 20 -
(b) not sharing any know-how, patent, copyright, trade-mark, licence, franchise or any other business or commercial right of similar nature or information or technique likely to assist in the manufacture or processing of goods or provision for services:"
6.4 In the instant case on verification of the agreement following facts are brought out:
1. The agreement not only provided for transfer of shares but also envisaged the transfer/ renunciation of the management of the company
2. Taxpayers were required to hand over business asets such as employee data base , product data base, customer proposals , etc , contracts, etc.
3. Taxpayer agreed to non compete clauses which prevented them from undertaking similar business for the period of two years. 4 There were specific clauses for non solicitation of present and future employees of the company and contracts of the company.
6.5 Therefore, after discussing the contents of the Agreement, it is beyond any doubt that the entire control and management over the business and the company has been transferred by the sellers to the purchaser, i.e. Lupin Pharma. Thus, the whole business has been transferred to Lupin Pharma on a going concern basis by the sellers as mentioned in this Agreement. In this context, it is relevant to highlight the cardinal principles enunciated in the Judgment of the Chandigarh bench of the Income Tax Appellate Tribunal in the case of Sumeet Taneja IT(SS)A Nos. 318, 319, 321 & 322/Ahd/2017 (DCIT vs. Smt. Seema Dalmia & Ors.) - 21 -
and Harbir Singh Khurana dated 8th June 2012. The Income- tax Appellate Tribunal has held in its judgment that substantial sale of unlisted equity shares by the promoters of the company will be treated as business income and not capital gains in the hands of the transferor.
6.6 The Hon'ble ITAT in paragraph no. 16 & 17 in its judgment has remarked that -
"16. Taking into consideration the entirerety of facts and circumstances of the case and agreement entered into between the parties as referred to by us in the paras hereinabove, it is apparent that the transaction in question was in the nature of purchase of business by the incoming company. The transaction entered into between the assessee before us as shareholder of M/s Excel Callnet Private Limited and the Managing Directors of M/s Pugmarks Interweb Pvt. Ltd. was not merely for the transfer of shares of the company but was in fact transfer of management of the company to the purchaser with a rider of noninterference by the sellers who were the Directors of the company. Reference is made to the Article 2.1 of the agreement dated 26.3.2005 wherein the seller i.e. the assessee before us was refrained from day-today management of the from the date of the agreement. In addition, the sellers i.e. the shareholders of the company were to hand over the Employee Database, Products Database, Customer Support, New Client proposals in pipeline, Other prospects and customer's database, Payment Recovery and Customer. 2danagement cases, Contract, Verbal Commitments, Banking Information, software/licenses and any other property that was acquired under the tenure of the Sellers working with the Company. Because of the complexity of the handing over operation by the sellers i.e. the shareholders of the company to the Managing Director of the new company, the parties entered into agreement on 26.3.2005 and had completed the process on 24.7.2005. If it was a mere sale of the investment by way of shareholding by the assessee then the said exercise was not required. Even the sale consideration agreed upon between the 13 parties including the consideration on account of non-compete covenant was paid in installment over a period of time. Further the transfer of shares in effect translated into renunciation of management by the seller Directors in favour of the purchaser which is apparent from Article 5.1.1 of the agreement which enunciated the delivery of effective resignation in writing by the Directors as part of the activities of the completion. The next point under consideration is the non-compete IT(SS)A Nos. 318, 319, 321 & 322/Ahd/2017 (DCIT vs. Smt. Seema Dalmia & Ors.) - 22 -
covenants agreed upon between the parties as per Article 8, under which Article 8.4 clearly stated the seller agrees not to engaged in any call centre, business process outsourcing or IT enabled services business in the States of Chandigarh, Punjab, Haryana or Himachal Pradesh within a radius of 100 Kms from Chandigarh for a period of 2 years from the date of this agreement. Further non-compete covenants imposed a restriction upon the seller Directors to directly or indirectly solicit a business that the company has done since its inception without prior written permission of the company. Under Article 8.10 there was renunciation of brand equity of the company by the sellers in favour of the purchaser as the parties agreed that the sellers will not take advantage of the brand equity of the company by using any names, logos, trademarks, partnerships, affiliations, names etc. As per para 8.11 the sellers cannot use domains that contain the word Excel and would not use or claim the domain name www.Excel.netcom. Article 9 of the agreement further refer to non- solicitation of employees covenant where by the seller will not directly or indirectly solicit, hire, employ, induce or attempt to induce any present or future employee of the company or the purchaser,"
17. In view thereof we are in agreement with the orders of the authorities below that the transaction in question was not mere transfer of capital asset within the meaning of section 2(14) of the Act but was in fact transfer of business as it was the assessee who was prevented from doing business. Further it was the assessee who had given up his rights to do business and i.e. how he received the consideration by way of price of shares fixed at Rs.94/- as against face value of Rs.10/- per share. The profits arising in the said transaction by way of transfer of share is assessable in the hands of the assessee as profits under section 28(va) of the Act. We find no merit in the plea of the assessee that the said shares were held only for the purposes of investment. The said shares were held by the assessee because of his association with M/s Excel Callnet Private Limited and were the mode of holding in the said compan y by the assessee, of which he was the Managing Director and was also engaged in carrying on the business on day-to-day basis. Such investment was in the business being carried on by the assesses and in view of the terms of the agreement agreed upon between the parties i.e. nonpayment of upfront share price of the shares sold by the assessee and the fixation of the agreed sale price of the shares which was not in consensus with the market price tabulated from the results shown by the assessee and also non- compete covenants agreed upon by the assessee and other shareholders for carrying on the business of BPO in the specified area of Chandigarh, full y support the view taken IT(SS)A Nos. 318, 319, 321 & 322/Ahd/2017 (DCIT vs. Smt. Seema Dalmia & Ors.) - 23 -
by the authorities below. In the entirety of the facts and circumstances, we are in agreement with the orders of the authorities below that the gain arising from the transfer of share is to be assessed as income from business. The provisions of section 28(va) of the Act are squarely applicable to the present facts of the case. Consequently, the ground of appeal raised by the assessee is dismissed.
18. The facts and the issues arising in ITA No.1102 /Chd/2009 are similar to the facts and issues in ITA No.1101/Chd/2009 and our decision in ITA No.1101/Chd/2009 shall apply mutatis mutandis to ITA No.1102/Chd/2009. The ground of appeal raised by the assessee is dismissed.
19.1n the result, both the appeals relating to assessment year 2006-07 filed by the different assessees are dismissed.
Order pronounced in the open court on this 8th day of June, 2012.
Sd/- Sd/-
(MEHAR SINGH) (SUSHMA CHOWLA)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated 8th June, 2012
SURESH/Rati
Copy to: The Appellant/The Respondent/The CIT/The CIT(A)/The DR Assistant Registrar, IT AT, Chandigarh"
6.7 The instant case of transfer of business by sellers is similar to the issues raised in the case before the Hon'ble ITAT, Chandigarh Bench. In the above case law the Hon'ble ITAT has mentioned that the transaction was in fact transfer of management of the company to the purchaser with a rider of non-interference by the sellers who were the directors of the company. Therefore, the Hon'ble ITAT has held that the gain arising from the transfer of share is to be assessed as income from business. Hence, the Hon'ble ITAT has held that provisions of section 28(va) of the Income-tax Act are squarely applicable to the present facts of the case. Further it is to be IT(SS)A Nos. 318, 319, 321 & 322/Ahd/2017 (DCIT vs. Smt. Seema Dalmia & Ors.) - 24 -
mentioned that the Hon'ble High Court of Punjab and Haryana in the case of Sumeet Taneja vs CIT , Supneet Kaur vs CIT has affirmed the ruling of the ITAT as mentioned above. On the basis of the principles enunciated in the order of Hon'ble HC , the gain arising from the transfer of shares as per the Share Purchase Agreement to be assessed as income from business and section 28(va) of the Income-tax Act shall be applicable on the transfer of shares by the sellers to Lupin.
6.8 The sellers have in their respective returns of income have shown capital gain on the sale of shares and the business to Lupin Pharma. The sellers have also claimed various deductions u/s.54 as well as set off their respective short term capital loss or long term capital loss from their respective gains on the sale of shares and the business of Rubamin Laboratories Ltd. The deduction u/s.54, the benefit of set off short term or long term capital losses the benefits of indexation shall not be available to the sellers (assessees) and the entire proceeds received by them shall be taxed under the head of business income. Hence, the sale proceeds received by the assessee, on sale of share alongwith business of Rubamin Laboratories Ltd. in proportion tohisshare holding, of Rs. 11,62,69,907/- is treated as business income of the assessee for the year under consideration instead of long term capital gain as has been claimed by the assessee. Penalty proceeding u/s 271(l)(c) of the Act are being initiated for furnishing of inaccurate particulars of income and thereby leading to concealment of income.
[Business income : Rs.11,62,69,907/-] IT(SS)A Nos. 318, 319, 321 & 322/Ahd/2017 (DCIT vs. Smt. Seema Dalmia & Ors.) - 25 -
7. Issue of transfer of shares of Rubamin Limited at Rs 1/- per share.
7.1 During the course of assessment proceedings, it was noted by the AO that one of the Directors of the company Shri Anil R Patel has transferred 10,90,000 shares of Rubamin Limited at the price of Rs 1/- per share to Shri Atul Dalmia. On the basis of facts on record and seized material, assessee was given showcause notice which read as follows:
"...........
3. During the course of assessment proceedings, it is found that you have purchased 10,90,000 shares of Rubamin Limited from Shri Anil R Patel at the price of Rs 1/-per share. The shares have been purchased on 04.07.2007. Thus cost of investment as shown in your books of accounts is Rs 10,90,000/-. In respect of this issue, various incriminating material is found and seized from the premise at office of Rubamin Limited, Synergy House, Baroda which is discussed hereunder a. Shareholder's agreement dated 06.06.2003 , annexed as Annexure A-l(Pg no 8-43) found and seized from the office of Rubamin Limited b. Shareholder's agreement dated 31.08.2005 , annexed as AnnexureA-l(pg 48 to 55) found and seized from the office of Rubamin Limited c. Shareholder's agreement dated 15.12.2006, annexed as Annexure A-l(pg 55-66) , seized from the office of Rubamin Limited d. Various documents, e-mails annexed as Annexure A-
7(Hard Disk information), from the office of Rubamin Limited .
From the perusal of the document at(a), it is seen that this agreement provides for methods for valuation of shares. The method considers the performance of the company, the position of its assets and liabilities, yield of company based on past records and future capacities and potential being determined by the market forces. Thus the method of valuation for shares was prescribed to protect financial interest of each party. In the later agreements various amendments or modifications were made , in which the concern has been reflected by parties to the agreement regarding subsequent sale of shares by Dalmia group at a higher price than IT(SS)A Nos. 318, 319, 321 & 322/Ahd/2017 (DCIT vs. Smt. Seema Dalmia & Ors.) - 26 -
at which the shares would be transferred to Shri Atul N Dalmia, then the excess so received would be shared between Dalmia Group and Patel group in proportion as existing prior to agreement Further concern is also shown regarding the value of shares determined as per the methods of valuation as mentioned in shareholders agreement dated 06.06.2003 being less than the market rate. In. that case to protect the interest of seller, the excess amount so received would be shared between Patel Group and Dalmia group.
7.3 Thus throughout the various agreement made , it can be seen that the basic concern of Patel Group was to receive the true value shares as per the potential of the company whenever the shares are transferred in favour of Dalmia Group. Thus on the background of examination of these agreements which are found and seized during the course of search proceedings, it is seen that the determination of the value of shares at Rs I/- per share is totally out of sync with the conditions precedent to the transfer of shares. The agreements entered prior to share transfer and instance of share transfer is totally opposed to each other.
Further the copy of seized material mentioned at (d) shows that price of share was much more than the price of Rs 1/-per share.
-Shares were allotted to employees under ESOP at Rs 80/-per share in March 2007
-Shares of Rubamin Limited (No of shares- 2198531) transferred to India Advantage Fund-V through its investment manager ICICI Venture Fund management Company at Rs 318.39/-per share(Rs 10/- per share + premium of Rs 308.39/- per share), date of transfer -06.07.2007
-Share transaction between same promoters at Rs 94/-per share in 2003 and thereafter there has been substantial improvement in the performance of the company
-Two associate partnership firms were acquired by company in recent past the date of transfer and shares allotted by company at Rs 225/- per share Thus on the basis of the seized documents and facts available on record, it is seen that market value of shares of Rubamin limited as on the date of transfer was much more than the rate at which they have been transferred. The value of shares as per the seized document is ranging from Rs 80/- to Rs 318.39/- per share , but it is nowhere nearby to value adopted by assesses for the transfer of shares. It is worthwhile to note that the date of transfer of shares between Anil R Patel and Atul Dalmia is 04.07.2007 while the date of transfer of shares between Rubamin Limited and India Advantage Fund -V through ICICI Ventures is 06.07.2007, Thus there is hardly any time lag between the two transaction. Still the price adopted for one transaction is substantially lower than price IT(SS)A Nos. 318, 319, 321 & 322/Ahd/2017 (DCIT vs. Smt. Seema Dalmia & Ors.) - 27 -
adopted for the other. Thus the fact and circumstances leading to transfer of share shows that assessee Shri Atul Dalmia has not correctly declared or disclosed the consideration paid by him and there is understatement or concealment of consideration in this respect.
Thus in this respect , you are requested to showcause why the market rate of Rs 318.39/- should not be adopted as the price paid for the transfer of shares of 10,90,000/~ between Shri Anil R Patel and Shri Atul Dalmia and the additional consideration paid by you should not be considered as your undisclosed investment and added to your total income for the relevant assessment year.
................."
7.2 In response to the same, assessee made his submission dated 02.02.2016 which has been perused but not found acceptable by AO on following grounds:
7.2.1 Assessee has submitted that issue under consideration has been verified during the course of regular assessment proceedings „ In this matter it is stated that no scrutiny assessment proceedings u/s 143(3) of the I T Act have taken place in the case of assessee for A.Y 2008-09. So the issue has never been verified in the case of scrutiny proceedings of assessee himself. Though scrutiny assessment proceedings have taken place for A.Y 2009-10, the issue mentioned above was not under consideration for that relevant year.
7.2.2 Secondly, it is pointed out that shareholders agreement mentioned at Sr. no. (a) to (c) of the show cause notice were found and seized during the course of search proceedings. There is no evidence to show that these documents were considered in the regular assessment proceedings of Shri Anil R Patel also.
These shareholders agreements were never furnished by assessee nor considered by department earlier. Further these are IT(SS)A Nos. 318, 319, 321 & 322/Ahd/2017 (DCIT vs. Smt. Seema Dalmia & Ors.) - 28 -
the important documents which show the intent behind the transaction of transfer of shares. Though they pertain to period before date of search, these agreements are vital for considering the history and intent of transfer of share. Thus there is no point in argument of assessee that the agreements are not relevant.
7.2.3 Further it is to be mentioned that annexure A-10 seized from the premises of Rubamin Limited contain the mails which are relevant for considering this transaction. The mail dated 01.07.2007 written by Milin Mehta, auditor of the company to Rajesh Gupta and copy to Atul Dalmia and others discuss about this transaction. It mentions that the earlier shareholder agreement has to be replaced with new one and earlier formula for determination of value of share has to be replaced with new formula giving the fair market value of shares.. Further it mentions that the transaction should happen in such a way so as to avoid tax from such. Thus these mails are important document which contain valuable discussion of the pricing of shares between the two promoters. Thus there is no point in assessee's argument w.r.t no incriminating material being found.
7.2.4 Coming to the merits of the case, the assessee's arguments w.r.t transfer of shares at price of Rs 1/- per share are not acceptable considering the background in which this transaction has taken place. In this context, it is relevant to highlight the conditions precedent to the transfer of shares by Shri Anil R. Patel to Shri Atul .N Dalmia. The genesis of the transfer of shares between the promoters and the reasons for such restructuring are enshrined in the Shareholder's Agreement IT(SS)A Nos. 318, 319, 321 & 322/Ahd/2017 (DCIT vs. Smt. Seema Dalmia & Ors.) - 29 -
dated 6th June, 2003 between Shri Anil R Patel Family (group) and Shri Atul N Dalmia family (group).
The reason for entering into the Shareholder's Agreement dated 6th June 2003 is mentioned on page no.41 of seized document (the Shareholder's Agreement is annexed from page no.8 to 43) annexed as Annexure A-l found and seized from the office of Rubamin Limited, which is as under:
"..AND WHEREAS the parties have expressed a desire to bring a clarity about the future functioning of the company and chart a path of growth and mutual rights and relationship between the groups so as to avoid any possible conflicts and make path of succession defined.
AND WHEREAS in pursuance of the discussion between the parties hereto it has been decided that on and from the date of the agreement, Patel Group shall transfer 1% of the shares held by them in favour of Dalmia Group on the agreed consideration and the relationship between the parties in the conduct, management and inter se relationship shall be governed by the present agreement."
The important and relevant provisions of this Shareholder's Agreement related to the share transfer between the promoters of the company " Rubamin Limited' are mentioned on page on.8 to 43 of Annexure A-l seized from the office of Rubamin Ltd at Synergy House, Baroda. The Share Holders agreement dated 06/06/2003 is attached herewith as Annexure A. It is mentioned under the head Terms of Agreement that, the agreement would IT(SS)A Nos. 318, 319, 321 & 322/Ahd/2017 (DCIT vs. Smt. Seema Dalmia & Ors.) - 30 -
last till both the groups continue to hold the shares of the company. Further 1% shares of Rubamin Ltd have been transferred through this agreement at the rate of Rs. 94.52 per share. Under the head "valuation of the shares of the company"
(point no.6) it is mentioned that the valuation of the shares of the company would be done in the manner and method provided in Schedule 3 to the agreement. Further it is mentioned that if the shares are acquired over a period of time jn different lots in different financial years, the financial figures applicable to the respective years would be the basis for deciding the valuation of the shares. Moreover, it is mentioned that where the valuation of the shares is required to be determined on any date during the first quarter of the financial year, then the valuation shall be carried out based on the figures of the first day of the financial year. In case, if the transfer of the shares takes place on any other day other than the first quarter of a financial year, then the valuation will be carried out as of the first day of the financial year and thereafter the aggregate valuation will be increased by the proportionate profits of the company up to the date of the close of the immediately preceding quarter for the incomplete year during which the shares are proposed to be transferred. Further under point no. 6.5 it is mentioned that it has been agreed between the parties that Dalmia group will be permitted to determine the manner in which the shares of the Patel group is to be acquired and also use the mode of buyback of shares at the relevant time and in such an event also, the valuation of the shares to Patel group shall effectively and financially be the same as has been arrived in accordance with the present agreement i.e. the Shareholders' Agreement dated 6 t h IT(SS)A Nos. 318, 319, 321 & 322/Ahd/2017 (DCIT vs. Smt. Seema Dalmia & Ors.) - 31 -
June 2003. Therefore, as per the clause no.6, it is evident that the shares have to be transferred by Shri Anil R Patel to Shri Atul N Dalmia in stages 1 to 3 and the shares to be transferred have to be valued as per the methods of valuation mentioned under Schedule 3. The methods of valuation motioned in this Shareholder's Agreement prescribe three steps:
"STEP:1 Ascertaining the value of the Division (Pharmaceutical Division, Metal Division and Zinc Division) as per the Net Asset Valu e method (NAV).
STEP:2 Ascertaining the value of the Division as per the yield Capitalization Method (YCM).
STEP:3 Working out the weighted average of the value arrived at by above method as per the weights assigned to both the methods. In case where value as per the YCM is less than the NAV then the YCM will be ignored on the principle that the minimum value of the division shall be NAV.
STEP:4 After the above, the following items should be added being the Market value of the surplus assets (as reduced by the tax impact of revaluation) and investments.
Investments in businesses commenced within last 3 years will be valued at the higher of the following two values:
(i) As per the method adopted for valuing pharma business of the company; or
(ii) Increase its valuation @ 6% p. a. from the date of investment (minimum return) provided the said business is continued on the date of valuation. Investments in assets other than in businesses (like investment in securities, fixed assets, bonds, etc) will be valued at the market value as reduced by the tax impact on revaluation.
After arriving at the value as per Step 3 of the respective division, the aggregate thereof, together with the value of the surplus assets will be the value of the company will be the value of each share of the company."
Hence, the method prescribed in this Shareholder's Agreement is scientific and considers the performance of the company, the position of its assets and liabilities, the yield of the company IT(SS)A Nos. 318, 319, 321 & 322/Ahd/2017 (DCIT vs. Smt. Seema Dalmia & Ors.) - 32 -
based on past records and future capacities and the potential of the company being determined by market forces. Therefore the method is logical and was incorporated to protect the interest of each party without compromising the interest of the company.
7.2.5 Further, certain modifications/amendments were introduced vide shareholder's agreement dated 31st day of August 2005 mentioned on page no.48 to 55 of Annexure A-l. The copy of evidence is attached in assessment order as Annexure B. From the perusal of clause no.l mentioned on page no.50 of annexure A-l, seized from the office of Rubamin Ltd., it is evident that the shares acquired by Dalmia group shall have a lock-in period of l(one) year from the date of acquisition of such shares and those shares cannot be transferred by Dalmia group at a price higher than the price at which the shares are so acquired from Patel group. However, if this condition is not followed by Dalmia group then the excess so realized on the transfer of those shares acquired from Patel group shall be distributed between Dalmia group and Patel group in the ratio of their inter-se shareholding, immediately prior to acquisition of shares by Dalmia group.
7.2.6 Further, another Shareholder's Agreement was entered into on 15 t h day of December 2006 between Shri Atul Dalmia family and Shri Anil R Patel family as appearing on page no. 55 to 66 of Annexure A-l seized from the office of Rubamin Ltd. Copy of which is annexed as Annexure C. On page no. 60,61,&62 of Annexure A-l, under clause 2(B) and 2(C) it is mentioned that the Parties (Dalmia and Patel groups) recognize that there is IT(SS)A Nos. 318, 319, 321 & 322/Ahd/2017 (DCIT vs. Smt. Seema Dalmia & Ors.) - 33 -
possibility of market value of the shares being different from the valuation of the shares calculated in accordance with the provisions of the Shareholders agreement. Hence to elucidate this concern, the agreement restricts Dalmia group to sell the shares within a period of one year from the date of purchase at a price higher than the price the Dalmia Group acquired the said shares from the Patel Group. In case, if the restriction is not followed (as it is evident in this case) then the consideration received in excess of the price between price at which the acquired shares are sold by the Dalmia group would be distributed between both the groups in the ratio of their pre acquisition shareholding ratio. Therefore, as per the perusal of these clauses it is clearly evident that there is an apparent concern/ regarding shares being transferred at a value lower than the market value in the process of transfer of shares by Shri Anil R Patel to Shri Atul N Dalmia. In this process, Shri Anil R Patel would be at a loss. To compensate this loss agreement mentions about sharing the excess received between both the groups in the ratio of their pre acquisition shareholding ratio. However, in reality by creating a facade ,the real substance and the real concern of Shri Anil R Patel was apparently not addressed in the transactions under consideration. The same was, however, taken care of by way of payments of the actual value of the shares made out of the books of accounts which precisely was the reason why this transaction, which apparently is disadvantageous to Shri Anil R Patel, has been agreed upon and accepted on paper by both these parties.
IT(SS)A Nos. 318, 319, 321 & 322/Ahd/2017
(DCIT vs. Smt. Seema Dalmia & Ors.) - 34 -
7.2.7 On 30 t h day of June 2007, another Shareholder's
Agreement in the context of Rubamin Limited was entered into between Dalmia group represented by Shri Atul N Dalmia and Patel group represented by Shri Anil R Patel. This Agreement is found annexed on page no. 67 to 86 of Annexure A-l. The reason for entering into this Agreement dated 30th June 2007 is mentioned on page on.84 of Annexure A-l page no. 84 of Annexure A-l under point no. C & D, the copy of agreement is attached herewith as Annexure D. Though there is no mention of the methods of valuation of shares, nonetheless it can be rightly concluded that the soul of this 'agreement' derives its strength from the Shareholder's Agreement dated 6th day of June 2003: wherein the methods of valuation of shares are specifically mentioned. Further, various modifications were made to the Shareholder's Agreement dated 6 t h June 2003; as discussed earlier, wherein concern has been reflected by parties to the Agreement regarding the subsequent sale of shares by Dalmia group at a higher price than the price at which the shares would be transferred to Shri Atul N Dalima group, then the excess so received would be shared between Dalmia group and Patel group in proportion as existing prior to the Agreement.
Further concern is also shown regarding the value of shares determined as per the methods of valuation mentioned in Schedule 3 of Shareholder's Agreement dated 6th June 2003, being less than the market rate. In that case, to protect the interest of the seller of transferor i.e. Shri Anil R Patel (Patel IT(SS)A Nos. 318, 319, 321 & 322/Ahd/2017 (DCIT vs. Smt. Seema Dalmia & Ors.) - 35 -
group), the excess amount so received would be shared between Patel and Dalmia group. In addition to this, the Shareholders Agreement dated 30th June 2007 contains the provisions of Transmission of Shares mentioned on page no. 75 & 76 of the seized document Annexure A-l. As per clause no. 10.1, it is mentioned that the shareholders have agreed that upon the death of Anil Patel, Atul Dalmia will have a right to acquire all the shares held by the Patel Group from the successors in law of Anil Patel or any Person to whom such shares have been bequeathed under the Will of Anil Patel or otherwise and the other Shareholders of the Patel Group at the FMV, payable no later in ninety days from the date of exercise of this right by Atul Dalmia. Clause no 10.4 mentions about the appointment of an independent Valuer who shall determine the fair market value of the shares on the basis of the value of the company on a going concern basis and after taking into account of underlying assets and future prospects of the company. Therefore on perusal of this clause also it is evident that the shares have to be transmitted to Shri Atul N Dalmia at the fair market value after the death of Shri Anil R Patel. Hence there should not be any reason to believe that there were conditions present which warranted the shares to be transferred by Shri Anil R Patel to Shri Atul N Dalmia at Re.l per share, i.e. much below than the FMV of the shares on the date of transfer.
7.2.8 Therefore, there was always a concern of the protection of rights of each party to the various agreements and the protection of rights cover the rights of each party in terms of control and IT(SS)A Nos. 318, 319, 321 & 322/Ahd/2017 (DCIT vs. Smt. Seema Dalmia & Ors.) - 36 -
management of company as well as the financial interest of each party.
Hence, it is also evident that there was no business expediency or exigency for the impending share transfer between Shri Anil R Patel and Shri Atul N Dalima. Further, During the course of assessment, assessee submitted that as the issues between both the groups were not solved amicably, hence they agreed to appoint Shri Mihir J Thakore. The copy of Arbitration dated 5th June 2007 was submitted by the assessee during the course of assessment proceedings. From its perusal, it can be gathered that even in the Arbitration agreement as well the basic concern of the Patel group was to receive the true value of shares as per the potential of the company whenever the shares are transferred in favour of Dalmia group. This issue has been discussed in point no. 11 of Arbitration Agreement dated 5th June 2007. The copy of agreement is attached herewith as Annexure E. As per clause 11(3), it is mentioned that the old shareholders' agreement required Patel group to dispose-off shares to Dalmia group at the price determined as per the formula provided for in the shareholders' agreement, irrespective of true value of the share and the potential of the company. Further, it is mentioned that for better running of the company a new shareholder's agreement ought to be entered into between the parties wherein no such clauses (the price determined as per the formula provided for in the shareholder's agreement ) should be found IT(SS)A Nos. 318, 319, 321 & 322/Ahd/2017 (DCIT vs. Smt. Seema Dalmia & Ors.) - 37 -
and the Patel group should be entitled to get the true value of the shares.
7.2.9 Hence, if all the Shareholder's Agreement and the Arbitration Agreement are read together, it can be reliably construed that the basic concern of Patel group was to receive the true value/ market value of share based on the potential of the company and its future progress. Therefore, the determination of the value of shares at Rs.l per share is totally out of sync with the conditions precedent to the transfer of shares. The Agreements entered prior to share transfer and the instance of share transfer appears to be totally antithetical and opposed to each other. The right s of the group i.e. Patel group is totally ignored and the purpose for which the Shareholder's Agreement and the Arbitration Agreement were entered upon, i.e. to protect and define the rights and obligations of each group (Patel group and Dalmia group) and the furtherance of growth of the company are totally ignored.
Further, the Arbitration Agreement without giving any reason has directed the Patel group to transfer 10,90,000 equity shares of the company to the Dalmia group at a consideration of Re. 1.00 per share. Therefore, through the award of Arbitration Agreement, Patel group did not get the true value of the share transferred as per the potential of the company, as desired by Patel group through various Shareholder's Agreement (discussed earlier) as well as in the Arbitration Agreement, The construction of Arbitration Agreement merely serves the IT(SS)A Nos. 318, 319, 321 & 322/Ahd/2017 (DCIT vs. Smt. Seema Dalmia & Ors.) - 38 -
purpose of a cloak or grab of legal document to hide the otherwise colorable transaction.
Hence, the conditions precedent to the transfer of shares do not in any way support the basis of transfer of shares from Patel group to Dalmia group at Re.1.00 per share. This is merely a mechanism of colourable transaction adopted by Shri Anil R Patel to avoid the incidence of tax on the transfer of shares (10,90,000 equity shares) to Shri Atul N Dalmia at Re. 1.00 each.
7.2.10 Some e-mails have been found annexed in Annexure A-10 from the office of Rubamin Limited, Synergy House, Vadodara. On the perusal of information in the mail server seized from the office premise of the assessee company annexed as Annexure A-10, a mail dated 01/07/2007, written by the auditor of the company Shri Milin Mehta from K C Mehta and Co to Mr. Rajesh Gupta, price House Water Coopers asking for his expert opinion is found (copy has been marked to Shri Atul N Dalmia, Shri Rajesh Aggarwal and Shri Ajay Aggarwal). As per this mail, it is clearly mentioned that through a shareholder's agreement entered into the year 2003, the shareholding was changed to 51:49 between Shri Atul Dalmia and Shri Anil R Patel respectively and 1% of shares of Shri Anil R Patel was purchased by Shri Atul N Dalmia at Rs.94 per share. Further, it is mentioned a new shareholding agreement has been entered upon by Shri Atul N Dalmia and Shri Anil R Patel, whereby prefixed formula for share valuation for inter-se transfer of shares was substituted with fair value determined by IT(SS)A Nos. 318, 319, 321 & 322/Ahd/2017 (DCIT vs. Smt. Seema Dalmia & Ors.) - 39 -
valuer. In addition, it is mentioned that no right is given to either party to either forcefully sell or forcefully purchase the shares from other promoters. It is also mentioned on the mail that through this shareholder's agreement it was agreed by the two parties (Shri Atul N Dalmia and Shri Anil R Patel) that the shareholding pattern between the promoters inter-se should be changed to 60:40 from existing 51:49. This would involve transfer of 9% shares of Shri Anil R Patel to Shri Atul N Dalmia. In addition, the mail also mentions certain other facts which shows that price of share was much more than the price of Rs 1/- per share and which should be considered. The above mail is reproduced in assessment order.
- It is mentioned that shares were allotted to employees under ESOP at Rs.80 per shares; 1,40,000 shares were allotted in March 2007 at Rs.80 per share.
-Company is signing an agreement with private investor who will be buying 19% of equity of the company at Rs 321.90 per share
-Share transaction between same promoters in 2003 at Rs 94/- per share and thereafter there has been substantial improvement in the performance of the company
-Two associate partnership firms were acquired by company in recent past the date of transfer and shares allotted by company at Rs 225/- per share.
IT(SS)A Nos. 318, 319, 321 & 322/Ahd/2017 (DCIT vs. Smt. Seema Dalmia & Ors.) - 40 -
Therefore, from the perusal of this mail, it is clearly evident that the shares have to be valued as per fair value determined by valuer and shares of the company have been transferred to private equity investor at a much higher price. From the details found in the case of Rubamin Limited , it is seen that Shares of Rubamin Limited (Number of shares=2198531) were transferred to India Advantage Fund -V through its investment manager ICICI Venture Fund management Company at Rs 318.39/- per share on 06.07.2007 i.e. just two days after the date of transfer of shares between Anil R Patel and Atul N Dalmia. Therefore, there was no reason to transfer the shares by Shri Anil R Patel and Shri Atul N Dalmia at Re. 1 per share.
7.2.11 Moreover on a note of restructuring of Rubamin Ltd. Found from Annexure A-7 from Rubamin Ltd., Synergy House, Baroda, it is mentioned that on 1/4/2006 (i.e. on the eve of Demerger of Pharma Division from Rubamin Ltd.) the book value per share of Rubamin Ltd. is Rs. 210.51.The note is reproduced as below:
1. Pharma Business of the company is demerged into a separate company named Rubamin Laboratories Limited, High court has approved the demerger w.e.f.
1" April 2006. The purpose of above de-merger and merger is to make Rubamin Limited a focused Metal company having interest in Cobalt, Copper and Zinc related business In demerger, all the assets and liabilities of pharmaceutical business (Dabhasa) as on 1" April, 2006 will be transferred to new demerged company at book value. The book value of the Pharmaceutical Business (Dabhasa) as on 1 s t April 2006 was Rs,22.33 crores (subject to change after completion of due IT(SS)A Nos. 318, 319, 321 & 322/Ahd/2017 (DCIT vs. Smt. Seema Dalmia & Ors.) - 41 -
diligence) Accordingly the purchase consideration shall be Rs.22,33 crores which shall be discharged by allotment of 2,365,004 Equity Shares of Rs.10 each of Rubamin Laboratories Limited at a premium of Rs.84.40 per share to the existing shareholders of Rubamin Limited.
After the de-reservation of zinc oxide from SSI list in the recent Finance Bill 2006, to consolidate all the zinc oxide business of the group at one place, M/s Zincollied (India) and M/s Zincollied Industry, two partnership firms of the group having Zinc Oxide {Metal grade} manufacturing plants in Daman are being merged into Rubamin Limited on going concern basis w.e.f. 1 s t July 2006. The purchase consideration will be the book value of the firms as on 30 t h June 2006 which is Rs, 10.94 crores (subject to change after completion of due diligence).
The book value of Rubamin Limited (excluding Pharma Business) is Rs. 52.63 crores (subject to change after completion of due diligence). The total No. of shares of RL as on 1st July 2006 was 25.00 lacs, hence book value per share is Rs. 210.51. Based on this valuation, total 5,19,871 shares of RL will be issued to partners of these two firms as purchase consideration.
3. Rubamin Limited is issuing bonus shares in the ratio of 3 shares against each shares. Hence after this bonus issue, company's paid up share capital will increase from Rs. 2.50 crores to Rs. 10,00 crores. The reserves of the company will reduce to that extent.
4. We are working to raise the share capital through private equity route. We expect to raise fund to the tune of Rs, 50-60 crores by this route. The funds will be deployed in the company's growth plans at OR Congo and India.
7.2.12 Further a certificate dated 02.08.2007 regarding net worth of Shri Anil R Patel duly signed by a Chartered Accountant has been found and seized from office of Rubamin Ltd. at Synergy House, Baroda as Annexure A-5, Page no 133. It is stated at sr.no.3 of this certificate that as per the certificate dated 10.07.2007 the investment in shares of Rubamin Limited IT(SS)A Nos. 318, 319, 321 & 322/Ahd/2017 (DCIT vs. Smt. Seema Dalmia & Ors.) - 42 -
by Shri Anil R Patel is valuing Rs 24,55,41,120/-, As on 31.03.2008, Shri Anil R Patel was holding 30,69,264 number of shares of Rubamin Limited. As per the records furnished by assessee, there is no transfer of shares of Rubamin Ltd. by Shri Anil R. Patel after 10.07.2007. Thus the number of shares held by him as on 10.07.2007 is taken as 30,69,264. Thus the value of shares of Rubamin Limited as per the certificate furnished by Shri Anil R Patel as on 10.07.2007 is Rs 80/- per share. The copy of certificate dated 02.08.2007 as found and seized is reproduced in assessment order.
7.2.13 Further, in the mail dated 01/07/2007 as discussed above in point no 9, certain questions for consideration have been posed which reads as under:
1) How this transaction of transfer of shares should be effected so as to avoid litigation on matters of valuation, capital gains, tax on the gifts, etc?
2) Can we take the recourse to either gift of shares or transfer at token consideration?
On perusal of the questions for consideration, it is amply evident that both the parties were concerned about incidence of tax if the transaction is effected on paper at fair market value of the shares involved and they were looking for ways and means so as to avoid tax in respect of income arising from such transaction and, hence, the transfer of shares was to be constructed in such manner to avoid taxation as well as litigation as regard taxation. Therefore, to avoid it being treated as gift transaction, the shares were transferred on paper at token IT(SS)A Nos. 318, 319, 321 & 322/Ahd/2017 (DCIT vs. Smt. Seema Dalmia & Ors.) - 43 -
consideration of rupee 1.00 as mentioned above. Hence, the whole transaction is nothing but a sham transaction which does not have any reasonableness and is merely a device to avoid taxation.
From the above discussion it is seen that Shri Anil R Patel and Shri Atul N Dalrnia have created subterfuge transactions to avoid payment of taxes. Shri Anil R Patel has adopted the mechanism of colorable transaction in collusion with Shri Atul N Dalmia, whereby he has avoidend paying the capital gains-tax by creating a 'form' or transaction which is devoid of ay rationale and serves only motive of avoidance of taxation. It also helped Shri Atul Dalmiya in parking his unaccounted income in acquiring assets in the form of shares from Shri Anil R Patel.
7.2.14 Ex-post Facto, it is evident to trace the path of circumstances (events) which led to the transfer of shares. From the genesis of discord or dispute i.e. the Shareholder's Agreement dated 6th June 2003 till the Arbitration Agreement dated 5th June 2007 (prior to the transfer of shares) it is clearly visible and evident that the Shareholder's Agreement and the Arbitration Agreement aimed at securing the rights and obligations of each party (Patel group and Dalmia group). In the course of these Agreements, Patel group has reiterated its rights in the form of receiving the true value of shares on its transfer to Dalmia group. This true means the fair market value of the share (which is also discussed in the Shareholder's Agreement). Hence, the chain of events leading to the Arbitration Agreement IT(SS)A Nos. 318, 319, 321 & 322/Ahd/2017 (DCIT vs. Smt. Seema Dalmia & Ors.) - 44 -
and the subsequent transfer of shares clearly postulate that the shares will / would be transferred by Patel group to Dalmia group at fair market value which should be considered as the true value of shares, thereby protecting the interest of the Patel group. Further receiving the true value of shares would also mean that there is a fair exchange between Patel group and Dalmia group whereby the Dalmia group has enhanced its shareholding and Patel group is being compensated of the loss on transfer of shares to the extent of reduction of shareholding in the company by the means of receipt of true value of shares. Therefore, there is an exchange/ sale transaction wherein the shareholding of one party is increased and the reduction in shareholding of another party is compensated in the form of value of shares paid to the party. However, in the instant case, as per the form created by Shri Anil R Patel and Shri Atul N Dalmia (the Arbitration Agreement and the subsequent share transfer) an unequal exchange transaction has been created.
7.2.15 The assessee in his submission has cited the following case laws which are discussed hereunder:
CIT vs George Henderson & Co. Ltd (1967)66 ITR 622 (SC)- This case law enunciated that the full value of consideration is the price bargained for by the parties to the sale.
But, in the case of the assessee it does not appear that despite all disputes and disagreement (as discussed earlier) Rs.l per share would be the "price bargained for " by the party to the sale. The price bargained for has to be seen in the context of conditions precedent to the transfer (as discussed earlier) and IT(SS)A Nos. 318, 319, 321 & 322/Ahd/2017 (DCIT vs. Smt. Seema Dalmia & Ors.) - 45 -
the reasonability of transaction considering the human probabilities of maximizing profit.
In this context the decision of Hon'ble Supreme Court in the case of Sumati Dayal Vs. Commissioner of Income- tax[1995] 214 ITR 801(SC) is relevant wherein the Hon'ble Court has given judgment on the basis of surrounding circumstances and applying the test of human probabilities.
Thus it is beyond human probabilities that one would sell the shares at a loss when all the surrounding circumstances indicate towards the fact that Shri Anil R Patel wanted fair market price for the sale of his shares.
Further in the case of George Henderson & Co Ltd, the Hon'ble Supreme Court has observed that if certain conditions are satisfied as mentioned in the first proviso to section 12B(2) of 1922 Act, the market value of the assets transferred, though not equivalent to the full value of the consideration for the transfer, may be deemed to be the full value of the consideration. To give rise to this fiction the two conditions of the first proviso are 1. That the transferor was directly or indirectly connected with the transferee and 2. That the transfer was effected with the object of avoidance or reduction of the liability of the assessee u/s 12B of 1922 Act.
In the instant case both the conditions are fulfilled i.e. the transferor is directly or indirectly connected with the transferee and the transfer was effected with the object of avoidance or reduction of the liability. The transferor and the transferee are the co-promotors of the company and there is substantial reduction of the liability to pay tax by Shri Anil R Patel as he has not transferred the shares at the fair market value or not even at the value at which he has not sold the shares previously to Shri Atul N Dalmia. Further the transfer has also not covered IT(SS)A Nos. 318, 319, 321 & 322/Ahd/2017 (DCIT vs. Smt. Seema Dalmia & Ors.) - 46 -
the principles as enshrined in the share holders agreement. Thus in this case market value has to be considered as full value of consideration.
Further, assessee has referred to the case of CIT vs. Gillanders Arbuthnot & Co. (1973) 87 ITR 407 (SC). In the case of CIT vs. Gillanders Arbuthnot & Co. (1973) 87 ITR 4O7 (SC), their lordship has observed that in the case of sale for a price, there is no question of any market value unlike in the case of an exchange.
In this case, the Hon'ble Court has made a difference between sale and exchange. Even in the context of sale, the Hon'ble Supreme Court has mentioned that in case of sales to which the first proviso to sub section (2) of section 12B is not attracted, all that we have to see is what is the consideration bargained for. Even if we consider that the share transfer between Shri Anil R Patel and Atul N Dalmia is sale transaction, then also it cannot be said that Re.l per share was the price bargained for by Shri Anil R Patel if we refer to the conditions precedent to the share transfer. The transfer of shares at Re. 1 share is merely a facade created by both the parties. The arrangement has the character of 'exchange transaction' where the transaction has been given a form of unequal exchange transaction-wherein substantial shareholding has been transferred at almost no value negligible value.
The transaction of shares which has taken place between Anil R Patel and Atul N Dalmia is "an unequal exchange transaction"
wherein substantial shareholding has been transferred to Shri Atul N Dalmia by Shri Anil R Patel at no cost or negligible cost. This is merely a facade to camouflage the real transaction.
IT(SS)A Nos. 318, 319, 321 & 322/Ahd/2017 (DCIT vs. Smt. Seema Dalmia & Ors.) - 47 -
Hence, as the transaction has the nature and spirit of exchange transaction therefore applying the sound principles enunciated in the judgment of Hon'ble Supreme Court in CIT vs. Gillanders Arbuthnot & Co. (1973)87 ITR 4O7 (SC), it may be rightly concluded the market value has to be adopted in the case of an exchange. Therefore, the market value should also be applied in the instant case.
Even the other case laws as referred by assessee have different facts than the case of assessee and hence cannot be considered to be applicable to the case of assessee.
On the above mentioned analysis of the facts and circumstances leading to the share transfer (as discussed earlier), a reasonable inference has to be drawn which shows that there is understatement or concealment of consideration in respect of the transfer. Market value of shares is the price which has accrued to the assessee on the transfer of shares which is the full value of consideration accruing to the assessee. On the basis of above mentioned analysis, it is seen that Shri Anil R Patel and Shri Atul N Dalmia have created a sham transaction which is devoid of any logic and reasoning. The transaction is in favour of one party at the detriment of the other party which is totally in contradiction with the existing facts and circumstances precedent to the share transfer. Therefore, artificial form has been created by the assessees Shri Atul R Patel and Shri Atul N Dalmia to circumvent the substance underlying the transaction.
IT(SS)A Nos. 318, 319, 321 & 322/Ahd/2017 (DCIT vs. Smt. Seema Dalmia & Ors.) - 48 -
On the basis of the above mentioned discussion, it is evident that Shri Anil R Patel has transferred the shares to Shri Atul N Dalmia at Rs 1 per share by creating a mechanism of colorable transaction as discussed supra. Therefore it is apparent that Shri Anil R Patel has received part of the sale proceeds out of the books and Shri Atul N Dalmia has paid part of the proceeds which is not reflected in his books of accounts.
7.2.16 On the basis of above mention discussion, it is relevant to quote the principles enunciated in various case laws related to Colorable Transaction which is squarely applicable in principle in the facts of this case.
It is most pertinent to mention here that a deliberate attempt to subvert the law to obtain tax benefit is an illegal act and impermissible. The law on the subject has been laid down by the Hon'ble Supreme Court in the case of McDowell & Co. Ltd.v. CIT[1985]154 ITR148/22 Taxman 11. Relevant extract from the head note is given below: -
"Tax planning may be legitimate provided it is within the framework of the law. Conlourable devices cannot be part of tax planning and it is wrong to encourage or entertain the belief that it is honourable to avoid the payment of tax by dubious methods. It is the obligation of every citizen to pay the taxes honestly without resorting to subterfuges (emphasis Supplied) There is behind taxation laws as much moral sanction as is behind any other welfare legislation and it is a pretence to say that avoidance of taxation is not unethical and that it stands on no less a moral plane than honest payment of taxation. The proper way to construe a taxing statute, while considering a device to avoid tax, is not to ask whether the provisions should be construed literally or liberally nor whether the transaction is not unreal and not prohibited by the statute, but whether the transaction is a device to avoid tax and whether the transaction is such that the judicial process may accord its approval to it. It is neither fair IT(SS)A Nos. 318, 319, 321 & 322/Ahd/2017 (DCIT vs. Smt. Seema Dalmia & Ors.) - 49 -
nor desirable to expect the Legislature to intervene and take care of every device and scheme to avoid taxation. It is up to the court of take stock to determine the nature of the new and sophisticated legal devices to avoid tax and to expose the devices for what they really are and to refuse to give judicial benediction."
Further , in the case of Union of India & Ors. Vs. Playworld Electronics (P) Ltd. & Anr. (1990) 184 ITR 308 (SC), it was reiterated that tax planning may be legitimate provided it is within the framework of the law. It was stated that colourable devices cannot be part of tax planning. The HonlDle Supreme Court has made an important pronouncement in the case of workmen of Associated Rubber Industry Ltd. V. Associated Rubber industry Ltd. [1986] 157 ITR 77 (SC), where the court held thus:
"it is the duty of the court, in every case where ingenuity is expended to avoid taxing and welfare legislations, to get behind the smoke screen and discover the true state of affairs. The court is not to be satisfied with form and leave well alone the substance of a transaction."
In CIT v. Durga Prasad More (1971) 82 ITR 540, the Supreme Court held as hereunder:
"it is true that an apparent must be considered real only if it is shown that there are reasons to believe that the apparent is not the real. The Taxing Authorities were not required to put on blinkers while looking at the documents produced before them. They are entitled to look into the surrounding circumstances to find out the reality of the recitals made in those documents."
It would also be pertinent to refer to what has been pronounced by the Hon'ble Supreme Court in the judgment in Sumati Dalyal v. CIT (1995) 214 ITR 801, reiterating the law IT(SS)A Nos. 318, 319, 321 & 322/Ahd/2017 (DCIT vs. Smt. Seema Dalmia & Ors.) - 50 -
laid down in CIT v. Durga Prasad More (1971)82 ITR 540(SC) that an apparent must be considered real only if it is shown that there are reasons to believe that the apparent is not the real and that the Taxing Authorities are entitled to look into the surrounding circumstances to find out the reality and the matter has to be considered by applying the test of human probabilities. Therefore, it is clear from the above judgments that the burden is on the assessee to show that the receipt is not of an income nature by giving an explanation; the income Tax Officer is not expected to put blinkers and accept it as it is; it is open to him to probe further and find out whether the apparent is real or not and take a decision on such probing, in the light of human probabilities. However, he should not act unreasonably.
The test of human probability is most significant to be referred to the circumstances such as in the present case where the assessee has used colorable device for avoidance of tax and it would be important to refer to the decision in the case of Som Nath Maini v. CIT [2008] 306 ITR 414 (punj. & Har.). In this case, the assessee in his return declared loss from sale of gold jewellery and also declared a short- term capital gain from sale of shares so that the two almost match each other. This simple tax planning became ineffective after the Assessing Officer disbelieved the astronomical share price increase applying the test of human probability. The Assessing Officer observed that short-term capital gains were not genuine inasmuch as the assessee had purchased 45000 shares of Ankur international Ltd. At varying rates from Rs. 2.06 t Rs. 3.1 per share and sold them within a short span of six-seven months at the rate varying IT(SS)A Nos. 318, 319, 321 & 322/Ahd/2017 (DCIT vs. Smt. Seema Dalmia & Ors.) - 51 -
from Rs. 47.75 paisa to Rs.55. Even though the two respective transactions for purchase and sale of shares were routed through two different brokers, yet the Assessing Officer did not believe the astronomical rise in share price of a company from Rs.3 to Rs.55 in a short-term. The assessee lost its case before the Tribunal. Confirming the order of the Tribunal, the Punjab and Haryana High Court held that the burden of proving that income is subject to tax is on the revenue but, on the facts, to show that the transaction is genuine, burden is primarily on the assessee. As per the Court, the Assessing Officer is to apply the test of human probabilities for deciding genuineness or otherwise of a particular transaction. Mere leading of the evidence that the transaction was genuine, cannot be conclusive. Any such evidence is required to be assessed by the Assessing Officer in a reasonable way. Genuineness of the transaction can be rejected in case the assessee leads evidence which is not trustworthy, and the department does not lead any evidence on such an issue.
Mid East Part Folio Management Ltd. Vs. CIT (2003) 81 TTJ (Mum)(SB)37, it was held that McDowell is more of an approach to the facts of a particular case than any inviolable rule laid down regarding tax evasion. It is a call to the Courts and Tribunals to expose subterfuges, colorable devices and dubious methods in tax cases. It is a caution administered that lawful dues to the state cannot be withheld under schemes acquired off-the -shelf or through transactions that have no commercial or economic value or by taking certain preordained steps which are calculated to cancel out each other. The IT(SS)A Nos. 318, 319, 321 & 322/Ahd/2017 (DCIT vs. Smt. Seema Dalmia & Ors.) - 52 -
approach in such cases must be to take the entire transaction or arrangement as a whole and see if it makes any economic or commercial sense without attaching weight to the steps that go to make up the scheme, each of which may be legally valid. The genuineness of the arrangement has to be viewed not in relation to every step taken. McDowell therefore, did not depart from what-has already been laid down by the Supreme Court earlier except that the law regarding tax evasion was restated in much stronger expressions such as "dubious device", subterfuge, colorable transaction", etc. The judgment did not permit the income Tax Authorities to rewrite or make a new contract for the parties nor did it say that they could not go behind the documentation in an attempt to find out the real intention of the parties. If the real intention of the parties is discovered to be something different from the intention professed in the document, the income Tax Authorities are at liberty to brand the same as a subterfuge or a dubious device or a colourable transaction. An identical issue arose in the case of ICICI Ltd. In respect of boiler purchase from and leased back to Gujarat Electricity Board (GEB) and therefore the same was also referred to the Special Bench and the ICICI Ltd., was added as an appellant. While discussing the judgment of the Supreme Court, in the case of McDowell and Co. Ltd. (supra), the Tribunal (SB) had, inter alia noted that the Courts and Tribunals had to expose subterfuges, colourable device, and dubious methods in tax case, that the lawful dues to the State cannot be withheld through schemes of subterfuge, a colourable device, and a dubious method, that the approach in such cases must be to take the entire arrangement as a whole and see if it makes IT(SS)A Nos. 318, 319, 321 & 322/Ahd/2017 (DCIT vs. Smt. Seema Dalmia & Ors.) - 53 -
any economic or commercial sense without attaching weight to the steps that go to 'make up the arrangement or the scheme, each of which may be legally valid, that the genuineness of the arrangement has to be viewed not in relation to every step taken to achieve that result but in relation to the final result, that one has to look at the truth of the transaction (and if permissible) by going behind the facade of documentation or the series of steps taken, that the Courts (and Tribunals) always have the freedom to 'go behind' the documents to find out the real intention of the party, that the rule presupposes that in a given case the real intention of the parties to a document/transaction/ arrangement could be different from what it appears from it ex facie, that the court must normally proceed on the basis of the professed intention, but if that is under doubt or is disputed or is challenged, then its power to find out the real intention of the parties by ignoring the apparent has to be and has always been conceded, that in case of make believe arrangement or a subterfuge or a dubious or a colourable device adopted , the Court will be merely removing the facade to expose the real intention of the parties cleverly cloaked and if that intention is discovered to be the evasion of taxes, it cannot be given effect to merely because all the steps taken as component parts of the arrangements are legally correct or valid, that the right of the parties to enter into transactions according to their free will and choice has always been protected, the only rider being that both the professed intention and the real intention should be the same, that all commercial arrangements and documents or transactions have to be given effect to even though they result IT(SS)A Nos. 318, 319, 321 & 322/Ahd/2017 (DCIT vs. Smt. Seema Dalmia & Ors.) - 54 -
in a deduction of the tax liability, provided that they are genuine, bonafide and not colourable transaction.
On the basis of the above mentioned discussion it is evident that Shri Anil R Patel has transferred the shares (10,90,000 shares of Rubamin Limited) to Shri Atul N Dalmia at Rs 1 per share by creating a mechanism of colorable transaction as discussed supra. Therefore it is apparent that Shri Anil R Patel has received part of the sale proceeds out of the books and Shri Atul N Dalmia has paid part of the proceeds which is not reflected in his books of accounts.
7.3 Thus on the basis of above discussion and facts on record, the full value of consideration is calculated adopting the fair market value of shares on the date of transfer. From the various evidences as discussed above, it is gathered that fair market value of shares of Rubamin Limited was much more than Rs 1/- per share at which the transaction is recorded in his books of accounts. It is pertinent to note that shares of Rubamin Limited (No of shares- 2198531) transferred to India Advantage Fund-V through its investment manager ICICI Venture Fund management Company at Rs 318.39/-per share(Rs 10/- per share + premium of Rs 308.39/- per share) on - 06.07.2007. India Advantage Fund is the third party investor to whom the shares have been transferred at the price of Rs 318.39/- per share. The shares have been transferred between Anil R Patel and Atul Dalmia on 04.07.2007. Thus there hardly any time lag between the two transactions. Thus considering that the transactions with third party are done at the market rate, the fair market value as IT(SS)A Nos. 318, 319, 321 & 322/Ahd/2017 (DCIT vs. Smt. Seema Dalmia & Ors.) - 55 -
on the date of transfer is taken at Rs 318.39/- per share. Thus full value of consideration is as follows:
Full value of consideration =1090000* 318.39/- per share=Rs 34,70,45,100/-
Less: Value of consideration shown in books of accounts=Rs 10,90,000/-
Unaccounted Investment=Rs 34,59,55,100/-.
Accordingly, Rs. 34,59,55,100/- is added back to the total income of the assessee for I the year under consideration. Penalty proceeding u/s 271(l)(c) of the Act are being initiated for concealment of income.
[Addition : Rs 34,59,55,100/-]
8. Transfer of shares of Rubamin Laboratories Limited by Shri Anil R Patel to Shri Atul N Palima.
8.1 Shri Anil R Patel has transferred 1,94,800 shares of Rubamin Laboratories Ltd. On 5th May 2007 at Re.l per share to Shri Atul N Dalmia and subsequently the same shares along with the business of the company were transferred by Shri Atul N Dalmia to Lupin Ltd. at Rs. 154.37 per share. Shri Anil R Patel also transferred his remaining shares of Rubamin Laboratories Ltd., to Lupin at Rs. 154.37 per share within two months of transfer of shares to Shri Atul N Dalmia. Hence, the transfer of shares at Re. 1 by Shri Anil R Patel to Shri Atul N Dalmia is devoid of any reasonableness and business prudence.
IT(SS)A Nos. 318, 319, 321 & 322/Ahd/2017 (DCIT vs. Smt. Seema Dalmia & Ors.) - 56 -
The act of Shri Anil R Patel is more bewildering considering that the shares were transferred at the rate of Rs. 154.37 per share within two months of the transfer by Shri Anil R Patel to Shri Atul N Dalmia at Re. 1.
Considering the above fact, assessee was issued showcause notice as follows:
"............
4. Further on verification of record, it is seen that you have purchased 1,98,000/-shares of Rubamin Laboratories Limited on 04.07.2007 at Rs I/- per share from Shri Anil R Patel and subsequently the same shares alongwith the business of the company were transferred by you to Lupin limited at Rs 154.37/- per share. You have also transferred your remaining shares to Lupin Limited at Rs 154.37/- per share on 25.09.2007. This fact of purchase of shares at less than market value seems bewildering after consideration of seized documents and facts on record which are discussed hereunder
-In the context of Rubamin Laboratories Limited, there is separate shareholder's agreement dated 30.06.2007, which is found annexed in Annexure A-7(back up of computer hard disk) seized from the office of Rubamin Limited.
This agreement talks about the equal terms and price to be fixed for the transfer of shares to the other group and to the third party , thus the shares transferred should have IT(SS)A Nos. 318, 319, 321 & 322/Ahd/2017 (DCIT vs. Smt. Seema Dalmia & Ors.) - 57 -
been transferred on the same terms and at the same price as was done in the case of shares transferred to Lupin. Therefore on the basis of conditions prevalent prior to the transfer of shares, it is observed that there was neither any compelling reason nor any rationale behind the transfer of shares at the rate ofRs I/-per share. Thus you are requested to showcause why the market rate of Rs 154.37/- should not be adopted as the purchase price paid for the transfer of shares of 1,98,000/- between Shri Anil R Patel and Shri Atul Dalmia and the additional price paid by you should not be considered as your undisclosed investment and added to your total income for the relevant assessment year.
.........."
8.2. In response to the same, assessee made submission dated 02.02.2016, which is perused but not found acceptable for following reasons:
8.2.1 It is to be noted that Rubamin Laboratories Limited was part of Rubamin Limited till June 2006. Thus the shareholders agreement as discussed in the issue of transfer of shares of Rubamin Limited also discussed about the transfer of shares of Rubamin Laboratories Limited. Thus as discussed in previous issue the incidents preceding the transfer of shares and the instance of transfer of shares are diametrically opposed to each other. Thus the arguments regarding shareholders agreement dated 2003 and subsequent amendments and implications are not repeated here as those agreements included IT(SS)A Nos. 318, 319, 321 & 322/Ahd/2017 (DCIT vs. Smt. Seema Dalmia & Ors.) - 58 -
the issues of Pharma Division also as it was part of Rubamin Limited at that point of time.
8.2.2 In the case of Rubamin Laboratories Ltd, there is no evidence of Arbitration Agreement and the assessee, Rubamin Limited has also not furnished any Arbitration Agreement. Rubamin Laboratories Limited became a separate entity from Rubamin Limited by the order of Hob'ble High Court dated 19th day of June 2006 in the Scheme of Demerger. In the context of Rubamin Laboratories Ltd also there is a separate Shareholder's Agreement dated 30th June 2007 which is found annexed in Annexure A/7 (back-up of computer hard disc) seized from the office of Rubamin Limited, which is annexed as Annexure-F. Under point no. C&D the reasons for entering into Shareholder's Agreement between Patel group and Dalmia group are mentioned which can be read as under
C. The Shareholders have agreed that their respective ri ghts and obligations with regard to their business relationship between them inter se and with the Company will be interpreted, acted upon and governed s olely to accordance with the ter ms and conditions of this Agreement and the Memorandum of Association and Articles of Association of the Company.
D. The Shareholders have agreed to ..... this Agreement for the purpose of recording the ..... agreements concerning the financing, operation and management of the Company and their mutual ri ght s and obli gations.
NOW THEREFORE, in consideration of the above premises and the mutual promises and covenants herein, t he mutual benefits to be deri ved therefrom and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties agree as follows:
1. Definitions and Interpretation 1.1 Definitions. In this Agreement, unless the context otherwise requires or expressly provides, the IT(SS)A Nos. 318, 319, 321 & 322/Ahd/2017 (DCIT vs. Smt. Seema Dalmia & Ors.) - 59 -
following words shall have the following meaning respectivel y:
R u b a m i n La b o r a t o r i e s Lt d . Page2 P r o mo t e r s ' S h a r e d h o l d e r s ' A g r e e m e n t After verifying various clauses of this agreement, it can be observed that before offering the shares for sale/transfer etc. to any third party, the shares have to be offered to the other group by giving a notice in writing (the selling notice) to the shareholders of the other group of his intention to sell his shares, spelling out-the number of shares beneficially owned by the offerer, the number of shares which make up the offered shares and the price at which the offered shares are proposed to be sold(the "offer price") and the terms and conditions of the sale of the Offered shares (the offer terms). In this case the "offer price" means the price at which he intends to sell the shares to the third party which in present case means at the rate of Rs. 154.37 per share as per Lupin Agreement and the negotiations prior to the final Agreement. Therefore there was no reason to sell the same shares at Re. 1 per share when the offer price as per this agreement was Rs.154.37 per share.
8.2.3 Further, it is mentioned under clause 7.6 that if offeree by any reason do not purchase the entire offered share then the remaining of shares can be sold to third party but at a price equal to or in excess of the offer terms and on terms no more favorable than the offer terms. Hence Shri Anil R Patel should not have transferred the shares to Lupin at a price equal to the price at which the shares were transferred to Shri Atul N Dalmia and should have been transferred at equal terms. Therefore this Agreement talks about equal terms and price to be fixed for the IT(SS)A Nos. 318, 319, 321 & 322/Ahd/2017 (DCIT vs. Smt. Seema Dalmia & Ors.) - 60 -
transfer of shares to the other group and to third party, hence the shares transferred to Shri Atul N Dalmia should have been transferred on the same terms and at the same price as was done in the case of shares transferred to Lupin (i.e. the offer price as discussed in previous paragraph).
8.2.4 In addition to this, the shareholders Agreement dated 30 t h June 2007 contains the provisions of Transmission of Shares mentioned on page no.76 of the seized document Annexure A-l. As per clause no. 10.1, it is mentioned that the shareholders have agreed that upon the death of Anil Patel, Atul Dalmia will have a right to acquire all the shares held by the Patel Group from the successors in law of Anil Patel or any Person to whom such shares have been bequeathed under the Will of Anil Patel or otherwise and the other Shareholders of the Patel Group at the FMV, payable no later than ninety days from the date of exercise of this right by Atul Dalmia. Clause no 10.4 mentions about the appointment of an Independent Valuer who shall determine the fair market value of the shares on the basis of the value of the company on a going concern basis and after taking into account of underlying assets and future prospect of the company. Therefore on perusal of this clause also it is evident that the shares have to be transmitted to Shri Atul N Dalmia at the fair market value after the death of Shri Anil R Patel. Hence there should not be any reason to believe that there were conditions present which warranted the shares to be transferred by Shri Anil R Patel to Shri Atul N Dalmia at Re. 1 per share, i.e. much below than the FMV of the shares on the date of transfer.
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8.2.5 Hence, on the basis of conditions precedent to the share transfer by Shri Anil R Patel to Shri Atul N Dalmia it is clearly evident that there was always a concern shown by Patel group that the shares might be transferred to Dalmia group and Dalmia group would pay the consideration which would be less than the true value of the shares (based on the potential of the company) or the fair market value of the shares as on the date of transfer. Therefore, on the basis of conditions prevalent prior to the transfer of shares there was neither any compelling reason nor any rationale or motive behind the transfer of shares at the rate of Rs. 1 per shares.
8.2.6 Further, it has been noticed that Rubamin Laboratories Ltd has been acquired by Lupin pharmaceuticals Ltd through share Purchase Agreement dated 20 t h September 2007 by acquiring all the existing shareholding of the company. Under clause no.B of the share Purchase Agreement dated 26 t h September 2007, it is mentioned that "the sellers are the legal and beneficial owners of 23,84,783 shares (hereinafter defined), which represent 100% of the current issued and paid up share capital of the company more particularly described in Annexure 1 hereto". Further, in the Article 1 (Definitions 85 Contention) point no. 1.1.18, "the Purchase Consideration" is mentioned, which reads as under:
"Purchase Consideration" shall man the sum of the payments to be made by the purchaser to the sellers, as more accurately set out in the payment Schedule in Article 4.1 below. The Purchase Consideration shall comprise of IT(SS)A Nos. 318, 319, 321 & 322/Ahd/2017 (DCIT vs. Smt. Seema Dalmia & Ors.) - 62 -
an amount of Rs.154.37 per share."
Further, in payment schedule is mentioned in Annexure-4 of the share purchase Agreement. As per the Annexure-4 (payment Schedule) all the shareholders comprising 23,84,783 shares is totality have been purchase for a total consideration of Rs. 36,91,38,952 crores at the rate of Rs.154.37 per share.
Thus as per this agreement, it is evident to point out that apart from other shareholders Shri Anil R Patel has also sold his remaining of shares held by him at the rate of Rs. 154.37 per share. Further, Shri Atul N Dalmia has also sold his shareholdings to Lupin at the rate of Rs. 154.37 per share which also includes 1,94,800 shares received from Shri Anil R Patel at the rate of Re. 1 per share.
Hence, neither the conditions precedent to the transfer of shares by Shri Anil R Patel to Shri Atul N Dalmia nor the conditions post transfer of shares justify the value at which the shares have been transferred by Shri Anil R Patel to Atul N Dalmia at the rate of Re.l per share. Therefore, there is neither any reason nor any rationale for transferring 194800 shares of Rubamin laboratories ltd at the rate of Rs.l per share by shri Anil R Patel to Shri Atul N Dalmia when it is clearly evident that all the shares of Rubamin Laboratories Ltd was to be purchased at the rate of Rs. 154.37 per share within two months of the transfer of these shares. It is not possible that the shareholders were ignorant of market price of the shares held by them or the negotiations with parties (including Lupin) for the acquisition of Rubamin Laboratories Ltd as both are the co promoters of the company.
IT(SS)A Nos. 318, 319, 321 & 322/Ahd/2017 (DCIT vs. Smt. Seema Dalmia & Ors.) - 63 - 8.2.7 On the basis of above mentioned discussion it is
imperative to discuss the motive for entering into such an arrangement (transfer of shares at the rate of Rs. 1 per share) which is merely a sham transaction or colorable transaction having no rationale and the purpose is only to evade taxes due on the transfer of shares by Shri Anil R Patel to Shri Atul N Dalmia. Shri Anil R Patel and Shri Atul N Dalmia were fully aware of the negotiations with Lupin and other persons interested in acquiring Rubamin Laboratories Ltd (being the promoters/ Directors of the company). They were fully aware of the price that RLL's sale would fetch in market or bidding . Hence, they entered into a colorable transaction whereby Shri Anil R Patel transferred 1,94,800 shares to Shri Atul N Dalmia at the rate of Re.l per share when the same shares were subsequently acquired by Lupin at the rate of Rs. 154.37 per share. It is beyond comprehension and against human probabilities that if Shri Anil R Patel was going to receive handsome consideration against the sale of his shares of RLL to a third party acquirer then what was the reason that forced him to sell the shares at Re.l per share and that too only 1,94,800 shares and not the whole shareholding of Rubamin Laboratories Ltd.
In this direction it is worth mentioning the fact that at the end of the relevant financial year Shri Atul N Dalmia had Short term Capital loss on mutual fund of Rs, 1,94,43,667/- and short term capital loss on Nifty Future of Rs. l,44,35,804/- (as per the submission made by the assessee), whereas Shri Anil R Patel did not have and such loss to be set off against the gain IT(SS)A Nos. 318, 319, 321 & 322/Ahd/2017 (DCIT vs. Smt. Seema Dalmia & Ors.) - 64 -
received on the sale of shares to Lupin Ltd, Hence Shri Atul N Dalmia has set off his short term losses against 1,94,800 shares received from Shri Anil R Patel on transfer. Hence the whole transaction was planned by Shri Anil R Patel and Shri Atul N Dalmia, wherein Shri Anil R Patel avoided paying taxes on the transfer of shares to Shri Atul N Dalmia and Shri Atul N Dalmia had the cushion to absorb the gain out of the sale of 1,98,000 shares to Lupin at Rs.154.37 per share. Hence the whole series of transaction is nothing but a creation of semblance of legal mechanism to hide or subterfuge the otherwise colourable transaction. Shri Atul N Dalmia had purchased the units of Mutual Fund in the month of 3 r d October 2007 and the record date was 14.1.2008, whereby the assessee received dividend in excess of Rs. 3 crores and thereafter he sold the units of MF at a loss of Rs. 19443667 before the end of the relevant F.Y in order to set off the loss against the short term gain received on the transfer of share from Shri Anil R Patel, No prudent person would sell his share/units at a loss when there was no exigency. Further it can be seen that the only purspose to sell the units of Mutual funds was to receive losses in order to set off with the short term capital gain. But in real sense there is no loss as the assessee has received Dividend in excess of Rs 3 crores on the record date.
8.2.8 From the perusal of the mail server data, Annexure A-10, it has been found that several mails have been written to the auditor of the company as well as the mails have been exchanged between the key persons of the company, wherein the concern regarding taxation on the sale of shares to Lupin IT(SS)A Nos. 318, 319, 321 & 322/Ahd/2017 (DCIT vs. Smt. Seema Dalmia & Ors.) - 65 -
Pharma have been raised. In this regard, a mail dated 01/07/2007 (copy enclosed herewith), written by the auditor of company to Mr. Rajesh Gupta, Price House Water Coopers asking for his expert -pinion is found (copy has been marked to Shri Atul N Dalmia Rajesh Agarwal and Ajay Agarwal).
As per this mail it is clearly mentioned that through a shareholder's agreement entered into the year 2003, the shareholding was changed to 51:49 between Shri Atul Dalmia and Shri Anil R Patel respectively and 1% of shares of Shri Anil R patel was purchased by Shri Atul N Dalmia at Rs. 94 per share. Further, it is mentioned a new shareholding agreement had been entered upon by Shri Atul N Damia And Shri Anil R Patel, whereby prefixed formula for share valuation for inter-se transfer of shares was substituted with fair value determined by valuer.
Further, in the same mail dated 01/07/2007, certain questions for consideration have been posed which reads as under:
1) How this transaction of transfer of shares should be effected so as to avoid litigation on matters of valuation, capital gains, tax on the gifts, etc?
2) Can we take the recourse to either gift of shares or transfer at token consideration?
On perusal of the questions for consideration, it is amply evident that the transfer of shares was to be constructed in such IT(SS)A Nos. 318, 319, 321 & 322/Ahd/2017 (DCIT vs. Smt. Seema Dalmia & Ors.) - 66 -
a manner to avoid taxation or litigation. Therefore to avoid it being treated as a gift transaction, the shares were transferred at a token consideration of rupee las mentioned above. Hence, the whole transaction is noting but a sham transaction which does not have any reasonableness and is merely a device to avoid taxation by Shri Anil R Patel.
8.2.9 Therefore prior to the acquisition of shareholding of Dalmia group and Patel group and others by Lupin Pharma Ltd., an arrangement or a facade or subterfuge was created by Shri Anil R Patel in collusion with Shri Atul N Dalmia to evade tax due on the transfer of shares of Rubamin Laboratories Ltd by Shri Anil R Patel to Shri Atul N Dalmia. As per this arrangement 1,94,800 shares were transferred to Shri Atul N Dalmia at Re. 1 each share. Hence no incidence of tax arose in the hands of Shri Anil R Patel and simultaneously when Shir Atul N Dalmia transferred these shares in the scheme of acquisition to Lupin, he set off his short term capital loss against the gain on the sale of these shares. Therefore, no tax on this transfer was paid by Shri Atul N Dalmia as well. Moreover, there was no reason for transferring the shares at Rs. 1 by Shri Anil R Patel when he along with Shri Atul N Dalmia were equally aware of the prospect of sale of these shares to Lupin Pharma at market rate or more than market rate. In this context it is again reiterated that colorable devices can not be part of tax planning. The various judgements as discussed in earlier issue are squarely applicable to this issue also. To avoid repetition they are not discussed separately here though it perfectly applies to this issue also. As has been held by the IT(SS)A Nos. 318, 319, 321 & 322/Ahd/2017 (DCIT vs. Smt. Seema Dalmia & Ors.) - 67 -
Hon'ble Supreme Court in the judgment in Sumati Dayal v. CIT (1995) 214 ITR 801, reiterating -he law laid down in CIT v. Durga Prasad More (1971) 82 ITR 540(SC) that an apparent must be considered real only if it is shown that there are reasons to believe that the apparent is not the real and that the Taxing Authorities are entitled to look into the surrounding circumstances to fine out the reality and the matter has to be considered by applying the test of human probabilities. Therefore, it is clear from the above judgments that the burden is on the assessee to show that the receipt is not of an income nature by giving an explanation; the income Tax Officer is not expected to put blinkers and accept it as it is; it is open to him to probe further and find out whether the apparent is real or not and take a decision on such probing, in the light of human probabilities.
8.3. Thus on the basis of above discussion and facts on record, the full value of consideration is calculated adopting the fair market value of shares on the date of transfer. From the various evidences as discussed above, it is gathered that fair market value of shares of Rubamin Laboratories Limited was much more than Rs l/-per share at which the transaction is recorded in his books of accounts. It is pertinent to note that 100% shares of Rubamin Laboratories Limited alongwith business as a going concern has been transferred to Lupin Limited which is a third party at the rate of Rs 154.37/- as per the share purchase agreement per share. But as discussed in Para 5, the actual price at which the shares have been transferred is Rs.178.21 per share. Thus full value of consideration is as follows:
IT(SS)A Nos. 318, 319, 321 & 322/Ahd/2017 (DCIT vs. Smt. Seema Dalmia & Ors.) - 68 -
Full value of consideration =1,94,800* 178.21 per share=Rs 3,47,15,308/-
Less: Value of consideration shown in books of accounts=Rs.1,94,800/-
Unaccounted Investment=Rs 3,45,20,508/-.
8.4 Accordingly, Rs. 3,45,20,508/- is added back to the total income of the assessee for the year under consideration. Penalty proceeding u/s 271(l)(c) of the Act are being initiated for concealment of income.
[Addition : Rs 3,45,20,508/-]
9. After discussion and on the basis of the data made available on record, the total income of the assessee is computed as under:
Income from business as discussed above in para 5 &6 Rs.11,62,69,907/- As discussed in para 7 above Rs. 34,59,55,100/- As discussed in para 8 above Rs. 3,45,20,508/-
Income from other Sources Rs. 29,679/-
G r o s s T o t a l I n c o me ... R s . 4 9 , 6 7 , 7 5 , 1 9 4 / -
L e s s : D e d uc t i o n ( c h a pt e r VI - A Rs. 1,00,000/-
T o t a l a s s e s s e d I n c o me ... Rs. 49,66,75,194/-
... . . u/ s 2 8 8 A ... Rs. 49,66,75,190/-
10. Assessed u/s 153A r.w.s. 143(3) of the Act 1961. Tax and interest u/s. 234A & B charged as applicable as per ITNS 150 which forms part of this order. Issued demand notice and Challan accordingly. Issued notice u/s 274 r.w.s. 271(1)(c) of the Act.
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11. Thereafter, assessee preferred first statutory appeal before the learned CIT(A) who granted relief to the assessee with following observations:
"5.4 After having perused the assessment order and the written submissions of the appellant and after hearing both the sides, I have noted that there is no dispute that Gopakumar (supra) which supports his contention that there is no restriction/limitation in the plain language of s. 153A with regard to scope of additions which can be made while refraining u/s 153A in "unabated"
assessment, AO has not been able to demonstrate as to how and why the contrary and binding view in the assessment had- remained unabated as on the date of the search. After perusing the Authorities relied upon by both the sides, I have also noted that though AO has relied on Kerala HC decision in Jurisdictional HC decisions in Saumya Construction Put. Ltd. 387ITR 529 (Guj) and in Desai Construction 387 ITR 552 (Guj) supporting AR's contention must not be followed. At the same time, I have noted that the AO in the assessment order has certainly referred to and relied upon some seized documents before making the impugned additions. As per the AR, these seized documents referred to by the AO are not "incriminating" because these are simple routin e documents/communications in normal course and the contents of these "documents" do not disclose even remotely any unaccounted transaction/receipt/payment, the information about which, has been or might have been withheld from the department or which "unearths" or even remotely is indicative of any "unaccounted" transaction or any undisclosed income, and hence the ratio of Saumya Construction (supra) and Kabul Chawla 62 taxmann.com 412 would squarely apply. On the other hand, the AO submitted that documents relied upon by the AO are incriminating in as much as these were not produced nor would have been produced during regular assessment and they reveal the true and fraudulent/sham nature of underlying transactions and therefore being of "incriminating" nature, the additions founded on such incriminating seized documents are not hit by ratios of Saumya Construction or of Kabul Chawla (supra). After appreciating the rival contentions and after perusing the documents relied upon by the AO, I have come to the conclusion that before the grounds raised by the appellant can be adjudicated, the issue whether each/any of the seized document relied upon by the AO is "incriminating" within the meaning and spirit of ratio of the Jurisdiction HC in Saumya Construction (2016) 387 ITR 529 (Guj) so as to confer valid jurisdiction on the AO to revisit the issue(s) and make related additions in fresh assessment u/s 153A, need to be adjudicated. For this purpose, detailed examination of the seized documents relied upon by the AO would be necessary. The IT(SS)A Nos. 318, 319, 321 & 322/Ahd/2017 (DCIT vs. Smt. Seema Dalmia & Ors.) - 70 -
nexus of such documents with the addition made by the AO would also need to be examined. As this essentially also involves going into the facts leading to each of the additions, I propose to firstly adjudicate the grounds 2-5 challenging the additions on merit after which I would revert to these (1.1, 1.2, 2.1, 3.1, 4.1 and 5.1) legal grounds.
8. I have carefully considered the material available on record. I have also very minutely gone through the "Offer Letter"
signed by both the parties and available on pages 7 to 10 of the assessment order. I have also gone through the e-mail exchanges printed by the AO on pages 13-15 of the assessment order. I have also noted that while the "Offer Letter" dated 28/8/2007 offered lump-sum consideration of Rs. 42.5 crores, the same is doubtlessly subject to underlying presumptions and conditionalities as stipulated in clause 2 of the Offer Letter. The Ld. AO has, despite his attention having been invited to the same, not taken note of the same and has unduly emphasized only the consideration portion of Rs. 42.5 crores. I have further noted that indeed the AO has correctly noted that internal e-mail exchanges printed on pages 13-15 of the assessment order and relied upon by him reveal that the appellant and other "sellers" of shares of RLL undoubtedly did expect, want, visualize or dream the deal with Lupin possibly to be fetching amounts of Rs. 44-45 crores. As such, the email of the appellant printed by the AO on page 14 of the assessment order also refers to expected or desired total consideration for the deal at Rs. 45+15 crores, though, it is explained by the AR that it is evident from the very e-mail on page 15 of the assessment order that "15" in the said e-mail refers to debt-component on the asset side of balance-sheet and is not even remotely indicative of "expected consideration", and, "45" does refer to expected initial consideration which was of course subject to various pros and cons as is to be normally expected to be in-built in such commercial deals. As per the AR, the AO has contradicted his own inference/conclusion in, on one hand relying on "offered consideration" as per the Offer Letter, while at the same time, on the other hand, overlooking the figure of 45+15 in one of the emails, and also in overlooking contents of clause 2 of the Offer Letter, thereby emphasizing AO's own demonstrated suspicion about validity of his own action of relying on an executory, inchoate, negotiation-stage and tentative e-mail communications (such reliance in any case, though, as per the AR, has no legal merit also). I have taken note of the final share-purchase agreement (SPA) entered into by the appellant with Lupin dated 26/9/2007 (PB page 112} which, as rightly submitted by the AR, is finally "executed" as against merely transient, inchoate, conditional and "executory" Offer Letter of Lupin. Having perused all these relevant documents and having noted the relevant factors as above, I find that the AR is absolutely right that there is not an iota of evidence brought on record by the AO, even after an IT(SS)A Nos. 318, 319, 321 & 322/Ahd/2017 (DCIT vs. Smt. Seema Dalmia & Ors.) - 71 -
extraordinary and intrusive action u/s 132, to establish, or even suspect, that even a rupee in addition to what has been mentioned in SPA has been received by the appellant or any other seller of the shares of RLL. The AO has proceeded merely on conjectures. She has merely surmised, without any even indicative evidence, that the appellant "must have received" the extra sale consideration as per the Offer Letter. Though, in my considered opinion, it is also a wholly irrelevant consideration for the AO as to why at all should the appellant accept a consideration lower than that stipulated in Offer Letter of Lupin, particularly when the Offer Letter itself contained in clause 2, the factors which would entail downward revision of consideration after "due diligence", the appellant has still and nevertheless satisfactorily demonstrated and established the reasons for acceptance of lower consideration as under:
Particulars Amount Amount Per share value (No. (Rs. in Crores). (Rs. in Crores) of Shares) 23,84,783 Consideration offered as per letter dated 28/8/2007 42.50 178.21 Less: Adjustments Bad inventory 3.096 Loss for year till date 1.04 Transfer of Land 0.70 Recovery of Fees to Yes Bank 0.85 5.6860 *Adjustment on account of 0.1805 5.8665 Supplementary Agreement Net Consideration receivable as per Share Purchase 36.8140 154.37 Agreement dated 26-9-2007 (36.6335) (153.61) *re-payment (refund) made as per supplementary SPA dated 26/9/2007
9. Emphasizing the obvious sanctity, integrity and conclusiveness of evidence of consideration for the deal at Rs. 36.8140 crores as per SPA, which has only been conjecturally and needlessly doubted by the AO without even attempting to impeach by bringing in any relevant evidences by the AO, the AR has also brought to my notice, and established by producing the copies of bank statements, that the deal consideration as per SPA dated 26/9/2007 was even further required to be reduced as per the very terms of SPA by way of execution of a. supplementary SPA, though unsigned and undated (page 187-191 of paper book). As per this supplementary agreement, a net adjustment amount of Rs. 18.05 lacs (Rs.47,07,000/- To be paid. Less - Rs.29,01,236/- To be received) has been reduced from earlier agreed consideration on account of various factors listed therein, and further, pro-rata amounts have also been paid/refunded to Lupin by cheques by each ex-shareholder of RLL as evidenced by bank-statements furnished and as per the details available on page no. 191 of the paper book. The AR submitted that this subsequent and independent event would further establish the legal, unimpeachable and binding sanctity and integrity of the SPA and of amount of consideration received as mentioned in SPA r.w.
IT(SS)A Nos. 318, 319, 321 & 322/Ahd/2017 (DCIT vs. Smt. Seema Dalmia & Ors.) - 72 -
Supplementary SPA. The AO has. without bringing any adverse evidence on record, simply brushed aside these explanations and contents of SPA and supplementary SPA and indeed based his decision on irrelevant considerations like e-mail exchanges which had preceded even the Offer Letter of Lupin dated 28/8/2007. I cannot agree more with the AR, and he is absolutely right that the negotiation stage "Offer Letter" issued by Lupin and "accepted" by the appellant is obviously an executory and conditional offer of consideration of Rs. 42.5 crores made by Lupin, which as per the very same document, was subject, to downward adjustment as per "underlying assumptions" in clause 2 and "after due diligence" as per clause 3 of the Offer Letter dated 28/8/2007. Clause 2(iii) clearly stipulates downward adjustment, and indeed, as rightly pleaded by the AR, the best person to decide the issue as to whether and if yes what amount of such downward adjustment may be acceptable, is only the appellant, and, AO has neither any authority nor any legal sanction in seating in judgment over the wisdom and propriety of appellant's (and other shareholders') such decision of acceptance of lower consideration. As per bullet-point 5 in clause 5 of Offer Letter, "Post financial, legal and technical due diligence, Lupin will confirm the final valuation number and will provide the legal documentation draft, In my considered opinion, the AO clearly erred in relying on this Offer Letter containing such categorical tentativeness and such possibility of downward adjustment, in preference to and in complete disregard of final SPA dated 26/9/2007. There is absolutely no evidence of any cash or additional payment received by the appellant. The e-mail or other communications between the parties/stakeholders to an agreement preceding the final SPA (as noted and printed by the AO on pages 13-15 of assessment order ) which in any case have been exchanged before even the Offer Letter dated 28/8/2007, have absolutely no bearing or relevance for the issue to be decided (amount of consideration "received or accrued" ) enabling or empowering the AO to discard the well- documented "full value of consideration" of Rs. 36.82 crores as depicted in SPA. As such, Section 48 of the Act explicitly refers and requires the AO to adopt only "full value of consideration received or accruing as a result of the transfer" for computing the Capital Gains. Without any evidence of receipt by or accrual to the appellant of any additional/unrecorded consideration, no substitution or replacement of documented consideration on presumptive basis is permissible in law. As such, I unhesitatingly agree with the Ld. AR that there is absolutely no credible material with the AO to even suspect that more than what is stipulated in SPA has been received as consideration for transfer of shares by the appellant. The sound and tenable explanation offered by the appellant for "difference" between "consideration as per Offer Letter9 and "consideration as per SPA", for which the provision is made in the Offer Letter itself, has also been basetessty and casually rejected by the AO. Consequently, the AO IT(SS)A Nos. 318, 319, 321 & 322/Ahd/2017 (DCIT vs. Smt. Seema Dalmia & Ors.) - 73 -
is also in error of law in only partially and conveniently reading the Offer Letter thus doing an impermissible interpretational damage to the evidentiary integrity of the document. It is elementary and settled principle of law that the document has to be read as a whole and the AO (or the appellant) is not authorized to partially and conveniently read the same by ignoring other parts of the same document. Thus, I find that the addition made by the AO is based merely on ill-founded suspicion, conjectures and surmises and has no foundation in any adverse evidence brought on record. As explained by Apex Court in Umacharan Shaw & Bros v. CIT [1959] 37 TTR 271 (SC), suspicion, howsoever strong, cannot partake the character of evidence. Thus, addition made by the AO merely on conjectures, by relying on irrelevant pre-offer letter (pre-28/8/2007) e-mail exchanges for doubting the sanctity and conclusive evidentiary value of the SPA dated 26/9/20O7 and also by ignoring vital parts of the very document (Offer Letter of Lupin)- relied upon by him and also by rejecting the plausible and substantiated explanation offered by the appellant, has absolutely no merits and deserves to be deleted. I may quote from the instructive and oft-quoted observations of Hon. SC in Umacharan Shaw & Others (1959} 37 ITR 271 (SC) for the mandate that mere suspicion can be no basis for addition and that suspicion cannot partake the character of evidence:
"The Department contends that one of the unusual features was that though the balances of the partners were fluctuating as their drawings were made, the profits continued to be divided equally. This is no doubt an unusual feature, but it depends upon how the drawings were considered by others. There was an arrangement in the deed itself for such drawings, and looking at the circumstances of the family the drawings during a year could not be said to be too extensive as others had withdrawn large sums also in their turn.
Taking into consideration the entire circumstances of the case, we are satisfied that there was no material on which the Income-tax Officer could come to the conclusion that the firm was not genuine. There are many surmises and conjectures, and the conclusion is the result of suspicion which cannot take the place of proof in these matters."
10. Thus and therefore, it is held that the consideration under the SPA paid by Lupin and received by the appellant and others, as evidenced by SPA, is no more than Rs. 36.814 crores giving a per- share consideration of Rs. 154.37. Accordingly, there is no understatement of "full value of consideration received by or accruing to the appellant" disclosed by him in the return of income at Rs.7,02,99,053/-. It is therefore also held that the amount of Rs.4,59,70,854/-held by the AO as unrecorded IT(SS)A Nos. 318, 319, 321 & 322/Ahd/2017 (DCIT vs. Smt. Seema Dalmia & Ors.) - 74 -
consideration as having been received by the appellant has no merits and therefore the addition so made to the tune o f Rs.4,59,70,854/- is deleted. Grounds 2.2 and 2.3 are thus allowed."
13. Per contra, the AO who attended relied heavily on assessment order and also drew my attention to the statutory provisions of s. 28(va) to point out that exclusion provided by proviso is only for sub-clause (a) of clause (va) and not for clause (b). In other words, it was the submission of the AO that sums received under non-sharing know-how or copy rights etc shall still be taxable u/s 28(va)(b), and therefore, if not the whole, at least part of the consideration received on transfer of shares must be held to have been rightly taxed under s. 28(va)(b). I have carefully perused and considered the material on record and have paatiently heard both the sides. The AO has, to begin with, not disputed the obvious that the transferred shares, clearly having been held as investment or as promoter share-holding, but for the fact of transfer of them being along with "control and management" and also along with "the whole business of RLL as a going concern", are capital asset within the meaning of s. 2(14), more particularly after insertion of Explanation below s. 2(14) by Finance Act, 2012. The AR is also right that at the time of demerger of RLL, this obvious position has also been accepted by the Department. In other words, the AO has clearly not alleged that the shares transferred were "stock in- trade" of the appellant or that they were "not capital asset". As such, the AO has not pointed to any fact on the basis of which it can be held that the shares held by appellant as investment are not Capital Asset as defined in s. 2(14). As rightly submitted by the AR during the course of hearing, once shares are capital asset, how in law the transfer of such capital asset is held by the AO to result into business income is not at all spelt out by the AO except by relying on Chandigarh Tribunal Decision in Sumeet Taneja (supra). I am at complete loss to understand and digest as to which provision of s. 28 makes, and which provision of s. 45 excludes, the transaction amenable to Capital Gains when "sale of entire shareholding" "along with control and management" "with business as a going concern" is undertaken by way of transfer of shares held indisputably as "capital asset" as defined u/s 2(14). AO neither in assessment order nor during hearing has thrown light on this aspect. With utmost respect, after perusing the ex- parte Tribunal decision relied upon by the AO as juxtaposed with Delhi HC decision in Shiv Raj Gupta and SC decision in Vodafone (both supra), I am convinced that these factors (of transfer of control & management, transfer of business as going concern and also some non-compete/non-solicit clauses as a part of the deal} are in no way relevant. As such, in my considered opinion, and as explained in Vodafone, shares of a company are indeed a bundle of rights, and are obviously capital asset as defined u/s 2(14), and consequences which follow (i.e. transfer of control/management IT(SS)A Nos. 318, 319, 321 & 322/Ahd/2017 (DCIT vs. Smt. Seema Dalmia & Ors.) - 75 -
and transfer of business) on account of "transfer" of shares can have no bearing, and no such bearing has been envisaged u/s 2(14) or u/s 28, so as to enable the AO on facts or in law to consider such transfer as "business". As such, newly inserted Explanation below s. 2(14) categorically and specifically includes "rights including the rights of control and management in relation to an Indian Company" within the definition of "property" for such rights to be Capital Asset. Thus, the major pillar of AO's action falls and has no validity in law. As rightly submitted by the AR, the CBDT Letter No. F.No.225/12/2O16/ITA.II dated May 2, 2016 also clearly prescribes such interpretation in general. The factors to be considered relevant by the AO as per para 3 of the CBDT letter, cannot obviously and by no stretch of imagination, include the scenario when shares held as investment are sold as a bulk in a solitary transaction. The AO is absolutely wrong in unreasonably stretching and twisting the facts and observing that it is "clearly evident" that Lupin has paid "the purchase consideration for the non-compete and non-solicit clauses as enshrined in the Agreement" when even if a part of the consideration received by the appellant was towards "non- compete" and "non-solicit" covenants, it is patently wrong to hold that the whole of the consideration for transfer of shares is exclusively towards such "non-compete" and "non-solicit"
covenants. Moreover, after perusal of Offer Letter dated 28/8/20O7 and SPA dated 26/9/20O7 I fully agree with the Ld. AR that neither Lupin attached any value to such "non-compete" or "non-solicit" clause in Offer Letter, nor has the appellant undertaken any activity in Pharma business even after lapse of 8-9 years so as to imply that such restraint by way of "non-compete"
or "non-solicit" clauses had "value" enough which resulted into transfer of any "asset" by the appellant to Lupin through SPA. The AR is also right in pointing out that clause (va) in section 28 has been brought in to bring within the tax net the exclusive and stand-alone transactions of undertaking "non-compete" and " non- solicit" or "non-sharing" restraints for a consideration, which receipts were hitherto not offered by the recipients of consideration even for capital gains claiming such receipts to be mere capital receipts without any underlying transfer of any asset. Moreover, the Ld. AR has also taken me through proviso of section 28(va) which categorically excludes from the purview of clause (va) the sums received on account of transfer of right to carry on business, which is chargeable under the head 'Capital Gains'. The AO is right in his submissions during the hearing that non-sharing of know-how etc as detailed in s. would fall u/s 28(va)(b) which has not been excluded by proviso. But in my opinion, when the consideration received on transfer of a capital asset has duly been disclosed under the head Capital Gains, as prescribed by CBDT letter dated 2/5/2016, and otherwise also, unless there are compelling and patent justifications, "Head Shifting" attempt by the AO is not warranted, Moreover and more recently, as held by IT(SS)A Nos. 318, 319, 321 & 322/Ahd/2017 (DCIT vs. Smt. Seema Dalmia & Ors.) - 76 -
SC in Vodafone (supra), a lump sum consideration cannot be allocated/ divided to assign to each component of an overall deal of transfer of shares. On a joint reading of section 2(14), section 28(va) r.w. proviso thereto, section 45(1), section 47(vib), section 48 and section 50B, and Board letter no.F.No.225/12/2016/ITA.II dated May 2, 2016 I have formed a considered opinion that a transaction of sale of entire shareholding in a company held as investment/capital asset which results eventually into complete transfer of the company along with rights of control and management, "lock, stock and barrel, as are the facts in the present case, remains chargeable under the Head 'Capital Gains' as held by Delhi High Court in Shiv Raj Gupta (supra). The AO has erred in attempting to bring the transaction within u/s 28(va) by unreasonably stretching and twisting the facts. The AR is absolutely right that once the gains are offered as Capital Gains, it has to be firstly shown by the AO that the amount is wrongly shown under this head rather than attempting to show that how "it could and possibly should have been offered under the Head Business'". It is important to note that in Shiv Raj Gupta (supra), the consideration for transfer of shares (for entire shareholding) was offered and brought to tax only under the head Capital Gains, .and AO further held that the consideration received was actually more by an amount colourably received by the appellant under a separate agreement purportedly for "non-compete" restraints (and claimed wholly exempt). The action was approved by HC and even "non-compete" receipt was brought to tax only under the Head Capital Gains as part of the deal of transfer of shares. Obviously, when the present appellant has shown the whole consideration under the head Capital Gains, the AO's attempt in bringing the amount to tax u/s 28(va) has no validity. It is therefore held that the gains arising on account of transaction of sale of shares of RLL was rightly disclosed by the appellant under the head 'Capital Gains'. There is no dispute or any adverse observation of the AO with regard to the cost of acquisition and the quantification of capital gains as disclosed by the appellant. Consequently, the whole addition of Rs. 11,62,69,907 /- is held wholly without merit and I have no hesitation in deleting the same. Accordingly, the addition of Rs.11,62,69,907/- is hereby deleted. The appellant gets equivalent relief. Grounds No.3.2 and 3.4 are thus allowed.
15.2 Having analyzed the material on record as above, and after grasping the basis of the AO in making the addition and the appellant's objections thereto, and after engaging with the relevant facts, I have come to a considered conclusion, which, in my considered opinion, more or less also emerges on its own and indeed effortlessly, that the AO has proceeded on no credible and relevant evidence at all, as rightly contended by the AR, in bringing the amount of Rs. 34,59,55,100/- to tax u/s 69B as "unexplained investment" in the hands of the appellant. As such, I IT(SS)A Nos. 318, 319, 321 & 322/Ahd/2017 (DCIT vs. Smt. Seema Dalmia & Ors.) - 77 -
tend to agree with each of the AR's rebuttals for each of the main planks of the AO as extracted by me above. Firstly, the AO of the counter-party (ARP) (seller of shares who disclosed transaction under the head Capital Gains), as also the AO of the group- persons namely Nandkishor Dalmia, GyanDalamia and MitaDalmia (who showed similar purchase @ Re.1) have, in orders passed by them u/s 143(3) for the relevant assessment year 2008-09 before the date of the search, have accepted, after due verification, the genuineness of the transaction of sale/purchase of shares of RL @ Re. 1/- in pursuance to the Arbitration Award. AO was under heavy onus therefore to demonstrate credible basis, based on reliable evidence rather than conjectures, for differing from a co-ordinate Officer, or her own predecessor (A.Y 2009-10) while disturbing the sanctity of finality of the issue, which, in my opinion, has not at all been even attempted to have been discharged by the AO. It is also evident that the AO has indeed erred in only partially, conveniently and twistedly reading the e- mail of Milin Mehta dated 1/7/2007. The said e-mail, seeking opinion/advice, is not at all seeking advice on "tax-avoidance through dubious means" as has been read by the AO, but is, while giving full details of the back-ground, merely seeking advice on structuring the deal while "avoiding litigation" on various issues including the tax-matters. The AO has held and treated the transaction to be "sham" and "colourable", without categorically pointing out that how the purchase which in fact has been undertaken at Re.1 and the back-ground for which is established by credible and cogent evidences, and when the seller also is not shown to have received any other benefits by direct or circuitous means, can at all be considered "sham" simply because receipt/payment of such "low consideration" somehow frustrates the AO. Appellant is also right that "why" of a transaction is primarily for the parties to a transaction to decide, and when the AO suspects "non-genuineness", she must "bridge the gap"
between "suspicion" and "evidence" rather than acting as if suspicion in itself suffices as evidence. The AR is also right that when the transactions of ESOP and equity participation by India Advantage Fund in RL have happened at the rates between Rs.80 and 318, and that "valuation under the Wealth-tax Act (page 36 of the assessment order) is nearly Rs.40 per share, it remains an established and accepted position that the transaction at Re. 1 per share is obviously below the "market rate" or "true value" of shares. Though "why should it be so" may be an aspect which could prompt the AO for necessary enquiry/investigation, but that in itself particularly in the background of Arbitration Award dated 5/6/2007 cannot per se be, in the absence of other credible evidences, a relevant consideration for deciding the dubiousness or otherwise of the transaction. I also agree with the Ld. AR that the said e-mail dated 1/7/2007 much emphasized by the AO to allege that the same establishes the collusiveness of the transaction entered into for avoidance of tax has indeed been IT(SS)A Nos. 318, 319, 321 & 322/Ahd/2017 (DCIT vs. Smt. Seema Dalmia & Ors.) - 78 -
conveniently read in a twisted way by the AO. The mail dated 1/7/2007 is a mail seeking advice. The full background including the comment therein that "the old SHA likely to raise several constraints in future to both the groups" has been conveniently overlooked by the AO. In my considered opinion, the two questions referred for consideration of the consultant in the said mail can in no way at all even remotely imply that the mail represents collusive nature of the transaction. I also agree with the Ld. AR that there is no evidence at all (except the transaction being at less than "true value") in possession of the AO to conclude that transaction is a colourable device. As such, the transaction achieves a real purpose and a real and irreversible change in the parties' positions rather than being a mere hollow documentation. The transaction is also not one which is a factual nullity. The transaction is also not a mere form without substance. It not only has produced tangible and intended financial and corporate consequences for parties thereto who, towards a pursuit of quietus inter se have come ad idem, but has also been duly disclosed in the returns of income filed at appropriate time by the parties. The AO has without any iota of evidence in her possession branded the whole Arbitration proceedings and Arbitration Award to be sham or collusive. While it is true, and rightly so pleaded by the AO both in the assessment order and during hearing, that "AO is not required to put blinkers on her eyes" and that "she may take recourse to surrounding circumstances and aspects of human probabilities", as ruled by Apex Court, but it is also equally true that these rulings of the SC do not certainly authorize the AO to act on no evidence or to act arbitrarily or draw adverse inference from wholly irrelevant material (mail dated 1/7/2007) that too by reading the same partially and conveniently. While AO must not "put blinkers", she must also not, more importantly, sec twistedly or start seeing what is not visible to others or which does not exist at all. The AO has indeed not appreciated that the pre-2007 SHAs doubtlessly indicate the growing concerns and taking of positions by parties thereto. When the two groups jointly agree for Arbitration proceedings and also act upon the consequent Award, it is wholly unconceivable why AO finds the same "unbelievable"
or 'sham" without bringing in any relevant evidence even after action u/s 132. Moreover, and more importantly, AR is absolutely right that the Arbitration Award dated 5/6/2007, while directing transfer at Re. 1 per share so as to achieve 60:40 holding ratio between the two groups, also drafted a new SHA, which was also executed on 30/6/2007 and which is evidently less complex and less strangulating to parties thereto and such new SHA is an integral and important part of the quietus brought in by Arbitrator. I have also perused the Arbitration Award and the submissions made before him by the parties to get an insight into the "curious deal at Re.1/- per share". It is evident that the SHA dated 6/6/2003 with subsequent amendments thereto, was conceived by both the parties to be, in a nutshell, irritating, IT(SS)A Nos. 318, 319, 321 & 322/Ahd/2017 (DCIT vs. Smt. Seema Dalmia & Ors.) - 79 -
strangulating and a drag on progress of the company RL. The Arbitrator, in para 15 passed the following order:
The share-holders' agreement dated 6th June, 2003, is declared to be void and unenforceable and deserves to be substituted by a fresh SHA as per Annexure A. I direct the Patel Group to transfer 10,90,000/- equity shares of the company to the Dalmia group at a consideration of Re. 1 per share"
15.3 In my considered opinion, the Arbitration Award, which has been baselessly 'tarnished by the AO, is a valid and legally enforceable document which has permanently transformed the rights and obligation of the parties thereto and which has also been duly evidenced to have been acted upon. There is absolutely no "factual nullity", or "mere form and no substance" or " self- cancellation" or "dubiousness" about the same. Consequently, the deal at Re. 1 for achieving 60:40 in consequence of and to give effect to Arbitration Award is indeed a genuine transaction achieving meaningful and real purpose permanently producing real, financial and corporate consequences. Thus, I have no hesitation what-so-ever in holding that the transaction of transfer of shares at Re. 1 per share is a genuine transaction within the four corners of law and there is no colourability or dubiousness about the same. Had it been the finding of the AO that any other benefit has flown from Dalmia Group to Patel Group and further that such transfer of benefits is a composite, collusive and integral part of the "deal of transfer of shares at Re.1", though structured independently/separately, then certainly I would have found that to be a relevant consideration and possibly also found myself in agreement with the AO. Similarly, had there been any evidence on record, as against mere presumption, that any unaccounted payment has in fact been made by the appellant to Shri Anil Patel, then also possibly I would have concurred with the AO's finding of colourability. I have for my satisfaction and as an abundant caution also obtained the bank accounts of Patel members for May-August 2007 and I find no receipt from any member of Dalmia. However, in complete absence of even an iota of evidence in this behalf, Ld. AR is absolutely right that attribution of colourability or dubiousness to the transaction by the AO remains baseless and therefore also the finding of the AO that the impugned transaction between the appellant and Anil Patel is a subterfuge must be held to be based on no evidence on one hand and against the evidence on record on the other. The AR is also right in submitting that what the AO in law could have done, in the face of the legally unquestionable transaction, was to examine whether the appellant is chargeable to tax u/s 56{vii)(c) or whether Shri Anil Patel is chargeable under the Gift Tax Act. As such, as rightly submitted by the AR, the legislature has indirectly visualized and recognized the full validity of a IT(SS)A Nos. 318, 319, 321 & 322/Ahd/2017 (DCIT vs. Smt. Seema Dalmia & Ors.) - 80 -
transaction of transfer of property for a consideration less than "fair market value" by inserting section 56(vii)(c). The AR is also right when he submits in the same breath that the mere fact that such insertion of section 56{vii)(c) has come into effect from 1/10/2009 and that therefore the appellant could not be brought to tax under such newly inserted provisions not applicable for the year under reference, cannot in itself also be a ground to brand such a legally recognized transaction as a "subterfuge". The AR is also right that no transaction can be held to be "sham" for the sole reason of "consideration being less than the market value", particularly looking to the fact that, legislature when considered so necessary, has enacted enabling deeming provisions like section 50C, or taxing provisions like section 56(vii)(c). I am of the considered opinion that for holding a transaction to be sham or subterfuge, the AO is obliged to establish that through a series of apparently unconnected transactions, in sum total, no real consequence except one of tax-evasion or tax-reduction has been achieved by the party in an orchestrated and dubiously executed series of apparent transactions with tax-evasion being the only hidden purpose. As against this, in the present case, there is a single and stand-alone transaction without any "nullity" even alleged by the AO. Tax-angle, but certainly not tax-evasion, is not only not at all hidden but is loud and patent, but at the same time, such "tax-angle" is unquestionably not the purpose of the deal though it is indeed a consequence, which is bound to be there in every transaction. There is no evidence of "self- cancellation" or "apparent being different from real". Thus and therefore, in my considered opinion, the impugned transaction has to be held as having no evidence of evility, no color of colourability, no semblance of shamness and no shade o f shadiness so as to be validly branded or treated as "sham" or "subterfuge''. In other words, I have no hesitation in holding that the transaction is real, meaningful and genuine and thus as one having been validly and genuinely entered into and acted upon within permissible limits of four corners of law. In this behalf, and before parting, I would also quote from Supreme Court decision in Vodafone as quoted in Shiv Raj Gupta (supra) and from Delhi High Court decision in D. S. Bist & Sons (supra) wliich touch upon the concept of colourability, and which sanctify my finding that the impugned deal of transfer of shares of RL at Re. 1 per share cannot in law be treated as "sham" or "subterfuge" (Emphasis mine):
31. Hon'ble the Chief Justice S.H. Kapadia referred to Furniss (Inspector of Taxes) v. Dawson [1984] 1 All EF 530 (HL.) and observed that the. decision was an extension of Ramsay principle Ramsay W.T, Ltd. v. IRC 1982 AC 300 (HL)) as it held that on facts the inserted step had no business purpose other than deferment of tax and Dawson reconstructed the transaction not on the dictum that IT(SS)A Nos. 318, 319, 321 & 322/Ahd/2017 (DCIT vs. Smt. Seema Dalmia & Ors.) - 81 -
anything done to defer tax should be ignored but on the premise that inserted transaction did not constitute "disposal" under the relevant Finance Act. Hon'ble the Chief Justice thereafter had no hesitation in recording that the tax authorities in England started rejecting every case of strategic investment/tax planning on the pretext that it amounted to and was with the object of evading tax. Noticing this ill-disposed effect, in Craven (Inspector of Taxes) v. White (Stephen) [1988] 3 All ER 495, it was held that the Revenue cannot start with the question as to whether the transaction was tax deferment or saving device but can apply the look at test to ascertain its true nature. Genuine strategic planning is acceptable and not abandoned. Thus, the judgment elucidates and explains the English judgments and their ratio. The majority judgment in McDowell's & Co. Ltd. case (supra) was referred to hold that tax planning may be legitimate, provided it is within the framework of law, but colourable devices cannot be a part of tax planning and it was wrong to encourage and entertain the belief that it is honourable to avoid payment of tax by resorting to dubious methods. Further, the majority decision agreed with the view expressed by Reddy, J. only in relation to tax evasion through colourable device by resorting to dubious methods and subterfuges. It did not hold that tax planning is illegitimate, illegal and impermissible. The opinion and view expressed by Reddy J, was only in the context of artificial and colourable devices. Thereafter, under the heading international tax aspects of holding structures" reference was made to Ramsay principle and it was reiterated that look at principle as enunciated requires the Revenue or the Court to look at the document or transaction in the context to which it property belonged, i.e. to understand the real nature of the transaction, one has to look at the entire transaction as a whole and not to adopt a dissecting approach. The look at test is to ascertain the true legal character of the transaction in a holistic manner. Genuine strategic planning with regard to the holding, structure, business operations, issues relating to investment etc. undertaken for corporate business purpose should not be treated as artificial or colourable device. In the said case, it was held that the transactions were not a colourable device. Reference was made to 'Westminster principle1 as expounded in The Commissioners of Inland Revenue v. His Grace the Duke of Westminsterl935 All E.R. 259, that when the document and transaction is genuine, the court cannot go behind it to some supposedly underlying substance. It was observed that in W.T Ramsay Ltd'scase (supra) the House of Lords did not discard the said principle but read it in a proper context by holding that "device" which was colourable in nature has to be ignored as a fiscal nullity.
IT(SS)A Nos. 318, 319, 321 & 322/Ahd/2017 (DCIT vs. Smt. Seema Dalmia & Ors.) - 82 -
Thus, W.T Ramsay Ltd'scase (supra) laid down a principle of statutory interpretation rather than imposing a tax avoidance doctrine on tax laws. It was elucidated that Westminster principle does not compel the court to look into the document or the transaction in isolation from the context to which it properly belonged. The task of the court was to ascertain the real nature of the transaction and while doing so, the court has to look at the entire transaction as a whole and not adopt a dissecting approach. The contention that we cannot look through and examine the real nature of the transaction in view of the authoritative pronouncement of the Supreme Court in Vodafone International Holidays B.V. Ltd's. case (supra) approving the view taken AzadiBachaoAndolan'scase (supra) is not apposite and congruous.
32. In his concurrent judgment, K.S, Radhakrishnan, J. has elaborately examined the Indian and English decisions on the question of tax avoidance and tax evasion. The following observations of Lord Tomlin in Westminster's case (supra) were quoted:-
"Every man is entitled if he can to order his affairs so as that the tax attaching under the appropriate Acts is less than it otherwise would be. If he succeeds in ordering them so as to secure this result, then, however unappreciative the Commissioners of Inland Revenue or his fellow taxpayers may be of his ingenuity, he cannot be compelled to pay an increased tax. This so-called doctrine of 'the substance' seems to me to be nothing more than an attempt to make a man pay notwithstanding that he has so orderedhis affairs that the amount of tax sought from him is not legally claimable."
33. Lord Atkin dissented stating "that the substance of the transaction was that what was being paid was remuneration." Thereafter, the principles which emerged from this Grace the Duke of Westminster case (supra) were stated as:-
"(1) A legislation is-to receive a strict or literal interpretation;
(2) An arrangement is to be looked at not in by its economic or commercial substance but by its legal form; and (3) An arrangement is effective for tax purposes even if it has no business purpose and has been entered into to avoid tax."
IT(SS)A Nos. 318, 319, 321 & 322/Ahd/2017 (DCIT vs. Smt. Seema Dalmia & Ors.) - 83 -
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Vodafone Tests
39. Expressions "tax avoidance, tax evasion and tax mitigation" are often spoken about, but differently understood. Rule of law mandates and requires a measure of certainty in understanding the said terms. Juristic explications on the subject are indicative of equivocating and divergent stand points. The distinction between the expressions; tax avoidance, tax evasion and tax mitigation has been a subject matter of several erudite articles with different perspectives like Morality on Tax Avoidance by Zoe Prebble and John Prebble; Interpretation of Tax Statutes:
tax avoidance and the intention of the Parliament by Judith Freedman; Tax Avoidance, Tax Evasion and Tax Mitigation by Philip Baker; and, Corporate Social Responsibility and Tax Avoidance: A comment and reflection by John Hasseldine and Gregory Morris. We acknowledge benefit of exposition and analysis in these articles as we elaborate on the said distinction. Discussion even after Vodafone International Holidays B.V. case (supra) is reflective that penetrating and perfect clarity of the said terms is not easy to discern and determine. To us the determination and ratio in Vodafone International Holidays B.V's case (supra) is clear.
40. The aforesaid decision in Vodafone International Holidays B.Vs case (supra) does not prescribe criterion simply predicated on preordained, circular or self cancelling transactions with a step or steps having no commercial or business purpose other than obtaining tax advantage. The decision does not exert the doctrine of economic substance. The ratio steers clear from using the said tests or principles. The said propositions and premise as specific tests stands disapproved and rejected.
41. The precise test enunciated and prescribed as a tenet, negates and disqualifies colourable device, deceit and sham as a legitimate and acceptable tax event. These terms have some-what ethical and casuistical connotations and are the elective test or differentiating tax planning from abusive tax avoidance.
42. To appreciate the concept of abusive tax avoidance, it would be appropriate to first delineate with precision the expressions "tax mitigation" and "tax evasion" as their boundaries and confines would enable us to draw lines amongst the four concepts; tax mitigation, tax evasion, acceptable tax avoidance and abusive tax avoidance. Each of the said expressions involves an element of tax planning.
IT(SS)A Nos. 318, 319, 321 & 322/Ahd/2017 (DCIT vs. Smt. Seema Dalmia & Ors.) - 84 -
It would be hard to conceive of a situation where the assessed does not indulge to some sort of tax planning, be it tax mitigation, acceptable tax avoidance, abusive ax avoidance or tax evasion. "Tax planning", being common to all situations, cannot be the distinguishing feature, but nature and character of the planning and its nexus nth the transaction is decisive.
43. Tax mitigation in simple words would refer to a taxpayer taking advantage or benefit of a beneficent provision under the tax code and complying with the requisites to his lower the tax liability. In the words of Lord Nolan in CIR v. Willoughby [1997] 4 All ER 65, it is:-
"The hallmark of tax mitigation, on the other hand, is that the taxpayer takes advantage of a fiscally attractive option afforded to him by the tax legislation and genuinely suffers the economic consequences that Parliament intended to be suffered by those taking advantage of the option".
The aforesaid quote uses the expression "economic consequences that Parliament intended" which as per some, causes confusion and is self contradictory. However, the said criticism overlooks that if the intention of the Parliament is clear and unambiguous; taking advantage or benefit as envisaged by the provision is a case of tax mitigation. Even in case of debate, when the intention of the Parliament is favourable and adjudication decides the question in favour of the assessee, it would be a case of tax mitigation. Courts are trusted and given the power to determine as to what was the intent of the Parliament while enacting a particular provision. When the court decision interpreting the legislative intent is in favour of the assessee, there is no avoidance of tax because the conduct is consistent with the taxing provision. If there is no tax avoidance, the question of abusive tax avoidance does not arise, for the latter refers to a particular category of transactions that are unacceptable being pejorative, i.e. sham, colourable device or deceitful and is distinct from tax mitigation. Albeit, where the Parliament's intention is to the contrary and the finding negates the assessee's submission, it would be a case of tax avoidance, whether acceptable or abusive is a different and another matter. Thus, the term "tax mitigation" is simple, intelligible and unequivocal. It is a positive term and refers to the assessed taking benefit or advantage of a provision which the tax code intends and wants to confer. Deductions under Chapter VIA, exemptions under Sections 10A, 10AA, 10B etc. of the Act are all provisions relating to tax mitigation. If an assessee takes benefit or advantage by complying with the stipulated IT(SS)A Nos. 318, 319, 321 & 322/Ahd/2017 (DCIT vs. Smt. Seema Dalmia & Ors.) - 85 -
conditions therein to reduce his tax liability, it would be a case of tax mitigation.
44. Tax evasion is illegal and consists of willful violation or circumvention of applicable tax laws to minimise tax liability. The assessed breaches the relevant law and it involves contumacious behaviour or actual knowledge of wrong doing. This can happen when an assessee deliberately fails to report an item in the income tax return, or knowingly claims a deduction which he is aware he is not entitled to, or consciously omits to supply information even when there is duty to furnish the said details. It can also apply to situations when the assessee fails to clarify a matter, which has been misunderstood by the income tax authorities, and keeps quiet. In these cases, there is element of willfulness, dishonesty or contemptuous conduct or even absence of honest belief. If the taxpayer cannot show that he had an honest belief that he was not liable to tax or liable to a lower tax, then prima facie such conduct would fall within the ambit/scope of tax evasion.
45. Tax avoidance by elimination would mean the residual and surplus, after we exclude cases of tax mitigation and tax evasion. Tax mitigation and tax evasion are two end points. It is easier and more beneficial to follow this discernment to define tax avoidance, for the confines and bounds of tax mitigation and tax evasion are easier to decipher and define legally and also identify with some exactness in practice. (Refer Tax Avoidance, Tax Evasion & Tax Mitigation by Philip Baker.)
46. It is equally important to distinguish and differentiate acceptable tax avoidance and abusive tax avoidance. The Supreme Court in CIT v. A. Roman & Co. [1968} 67 ITR 11, at p. 17 had observed:-
"Avoidance of tax liability by so arranging commercial affairs that charge of tax is distributed is not prohibited. A taxpayer may resort to a device to divert the income before it accrues or arises to him. Effectiveness of the device depends not upon considerations of morality, but on the operation of the Income-tax Act. Legislative injunction in taxing statutes may not, except on peril of penalty, b e violated, but it may lawfully be circumvented."
47. In clear and categorical terms the aforesaid ratio was resonated and approved by the Supreme Court in the Vodafone International Holidays B.V's case (supra). Thus, the test of 'devoid of business purpose' or 'lack of economic IT(SS)A Nos. 318, 319, 321 & 322/Ahd/2017 (DCIT vs. Smt. Seema Dalmia & Ors.) - 86 -
substance' is not accepted and applied in India as it is too broad and unsatisfactory. The said test, if ardently applied, would contradict and would be irreconcilable with taxpayers' right to arrange once affairs within die confines of law, which is not prohibited or barred.
48. Naturally, the dividing line between acceptable and abusive tax avoidance cannot be deduced or inferred from lowering or elimination of the tax liability. Latter is the consequence and the tax effect. It is the post facto consequence under the tax code of the event selected by the assessed. The test applied should not curtail the freedom of choice to adopt a particular transaction or combination of transactions to reduce or eliminate the tax liability.
49. At the same time, the dividing line as per the ratio in Vodafone International Holidays B.Vs case (supra) is ethically principled and moralistic as tax avoidance is disapproved when the assessee adopts a colourable device, dubiousness and otherwise indulges in a sham arrangement or transaction. This would mean that pre-ordained, circular or self-cancelling transaction with a step or steps having no commercial purpose or lack of economic or business purpose could in a given case be, though not necessarily, a relevant fact, yet they are not the touchstone, yardstick or the final test. These could be circumstances or facts to infer and discern whether the taxable event selected was a colourable device, sham or deceit and not the tax event intended by the parties. Right to choice to select the most beneficial legal way and manner to execute a transaction is unquestionable and perennial. A tact is not the test; rather the corrupt and mendacious conduct, i.e. colourable device, sham or deceit, is the specified bright line, dividing acceptable tax avoidance from abusive tax avoidance.
50. The assessed is well within his right to choose any one event between two or more events and select an event to minimize or reduce his tax liability. The Act, i.e. the Income Tax Act, 1961, imposes and saddles tax liability on the chosen tax event. The Act per se, unless a provision so stipulates, does not restrict or curtail the right of choice. Tax is determined and gets crystallized on the tax event adopted by the assessee. For example, in Vodafone International Holidays B.V's case (supra), the assessee had several options and therefore, right to choose a particular tax event. As long as the choice is within the framework of law, the Assessing Officer cannot disturb the tax effect or liability, which is the consequence of the event. The choice IT(SS)A Nos. 318, 319, 321 & 322/Ahd/2017 (DCIT vs. Smt. Seema Dalmia & Ors.) - 87 -
of the assessee is not abrogated or invalidated. For example, a company has several legal options, and therefore, right to choose how to dispose of a capital asset, as in Vodafone International Holidays B.Vs case (supra). Similarly, an assessee can opt for and has multiple options for raising debt to finance business expansion plans. The assessed may have several legally permissible alternatives to effect and divide the assets on partition. Such examples are numerous. The choice night result in mitigation of tax liability, but the tax effect would not classify or help us differentiate between tax avoidance and abusive tax avoidance. Any attempt to minimize or eliminate tax liability would not make the choice of the tax payer abusive tax avoidance. The foundation of the said principle is that the tax code by its nature differentiates between different types of actions, transactions, arrangements and activities and then identifies and stipulates the consequences, "he tax code, i.e. the Income Tax Act, 1961 is rule based and complex. The Act is not entirely principle based. The provisions are read and applied. Principle of purposive interpretation both in favour of Revenue or assessed can be applied but within four corners of law. In fact, in some cases, the assessed may find themselves taxed at a higher liability for failure to choose a more tax friendly event. But the right of choice is hedged with one significant condition. The event selected, as noticed above and subsequently, should be real and not a colourable device, sham and deceit.
51. Tax reduction is not an evil if you do not do it evilly [MurphyLogging Co. v. US [1967] 378 F.2d 222]. The assessee acts evilly when there is camouflage or dubiousity to mask and masquerade the real intent of the transaction which the parties intended and the document(s)/transaction(s), is at variance with the actual intent. The assessed in such cases does not choose the real event as one from the multiple choices, but adopts a sham or colourable event. The assessed then acts fraudulently, deceitfully or in a corrupt manner. He does not choose an event which is useful, viable and tenable, but employs deception and visors to pretense a state of affair which is different from the actual or real state of affairs. The event propounded is contrary to his intention. When the event selected is artificial it can be treated as colourable, deceitful or sham. The artificial event is one which purports to be one thing but in fact is another. Thus, abusive tax avoidance is a matter of evil intention and a result of dishonest behaviour of the assessed......"
The Delhi High Court in D. S. Bist & Sons held as under:
IT(SS)A Nos. 318, 319, 321 & 322/Ahd/2017 (DCIT vs. Smt. Seema Dalmia & Ors.) - 88 -
The agreement, dated 20-8-1963, had been held to be a valid agreement entered into by two parties who were dealing with each other at arm's length. As the agreement was genuine, as held by the Tribunal, and the two parties had independently come to that agreement as commercially expedient, the income tax authorities could not lightly overthrow that agreement unless there were cogent circumstances existing on the record. The authorities did not hold that the loan was not advanced in the ordinary course of business. Thus, in case a loss resulted, it would be allowable as a deduction either as a bad debt or as loss incidental to business. Further, no circumstances were available on the record to come to the conclusion that the distribution of the total price over the assets was not in accordance with the commercial practice. Under the taxing system it was up to the assessee to conduct his business and in his wisdom, the assessee may enter into commercial transactions with another party who is ad idem with the assessee as to the terms and conditions. In the absence of any collusion between the two, it was not possible to vary the terms on the facts and in the circumstances of the case.
15.4 Moreover, the addition in the hands of the appellant has been made by the AO as "unexplained investment", which, as per AO, "must have been made/paid by appellant" out of unaccounted sources. This allegation and conclusion of the AO based thereon has rightly been challenged and described by the AR as preposterous. Even if the transaction is indeed sham or is a subterfuge, still it has not been brought out or explained by the AO, and it doesn't appeal to the sense of fairness or reason, as to how could the appellant be held to have made "unaccounted investment"? There is no evidence at all on record for this finding by the AO. There is only a conjecture, presumption and surmise and indeed no finding at all that appellant made any payment more than Re. 1 per share. In this background, I have to observe that even if the AO's finding about colourability of the transaction is upheld, then also I would have found the addition made by the AO to be not sustainable on facts or in law. While making this addition, the AO has firstly surmised that "amount in excess of Re.1 per share" must have been paid by the appellant. Secondly, the AO has further surmised that such payment must have been made by the appellant in cash. I agree with the contention of the Ld. AR that addition u/s 69B as "deemed investment" cannot be made in law in the absence of clear and categorical evidence (as against mere inference or mere surmise). The twin legal conditions required to be satisfied for making the addition u/s 69B are that there must be evidence on record that payment has been made and second that such payment/ in vestment has not been recorded in the books of account. None of the conditions can be said to have been satisfied merely on the basis of inference/ surmise when no IT(SS)A Nos. 318, 319, 321 & 322/Ahd/2017 (DCIT vs. Smt. Seema Dalmia & Ors.) - 89 -
categorical evidence has been brought on record or even referred to by the AO. The facts are covered by a series of decisions relied upon by the AR and also by Supreme Court decisions in George Henderson & Co. (supra) as also in Gillanders Arbuthnot & Co. (supra), and therefore the addition being wholly without merit, stands deleted.
15.5 In conclusion, it is held that the transaction of purchase of shares of RL by the appellant from Anil Patel is a genuine transaction. There is no evidence on record to conclude that appellant paid any amount more than Re. 1 per share for this purchase. Consequently, addition of Rs.34,59,55,100 made by the AO is deleted. Grounds 4.2 to 4.4 are allowed.
17.2 I have duly considered the facts on record and perused the assessment order and the written submissions of the appellant. In my considered opinion, except the absence of "Arbitration Award", the facts leading to the present addition by the AO are exactly identical to the facts obtaining with regard to the addition in connection with transaction of transfer of shares of RL at Re. 1 per share. I find reason and persuasion in AR's submission that there is compelling implication in the Award to reasonably infer that achieving 60:40 ratio in RLL also could and would be an implied but integral necessity and integral part the deliberation/concerns leading to Arbitration Award of so as to achieve intended quietus. The Ld. AO's argument that the transaction is meant to defraud the revenue, has also no substance in as much as even if the transaction is to be considered "sham", the only consequence vis-a-vis the appellant would be lesser capital gains. The finding of "transaction being sham" cannot, even in the wildest dreams, lead to a conclusion of unaccounted investment by appellant. Even the AO's observation, allegation and argument that the appellant had "space" on account of short ter m capital loss on mutual funds and on NIFTY futures and therefore the transaction is accommodative and collusive is also without substance and wholly without verification of basic facts. As rightly submitted by the AR, the appellant, only after purchasing the shares from ARP on 4/7/2007 (payment debited in bank account on 9/7/2007) and only after earning the capital gains on further sale to Lupin, has entered into transactions which resulted into STCL as under:
S r. No . S cr ip Da te o f P u r ch a s e Da te o f sa l e R esu lt (a p p ro x. ) 1 UTI I n d . F u n d 4 /1 0 /2 0 0 7 1 5 /1 /2 0 0 8 - 1 .9 4 c ro r es 2 NI F T Y fu tu re 3 /1 2 /2 0 0 7 1 5 /0 1 /2 0 0 8 - 1 .4 4 c ro r es 3 Div id en d I n co m e (ta x- f r ee ) +3 .6 c ro re s 4 Net R e su lt O.2 2 c ro re s 17.3 Thus, nothing much can be read into or found support from the fact of short term capital loss having been offset by short ter m IT(SS)A Nos. 318, 319, 321 & 322/Ahd/2017 (DCIT vs. Smt. Seema Dalmia & Ors.) - 90 -
capital gains. I have already held that there is no credible material with the AO to treat the transaction as sham or subterfuge. I have also held that even if the transaction is held to be a subterfuge, no addition as unaccounted investment u/s 69B can be made in the hands of the appellant in the absence of any positive evidence of "extra and unaccounted payment" brought on record by the AO. Thus, it is held, following the reasoning given in para 15 above that the transaction of purchase of shares of RLL by the appellant at Re. 1 per share is a genuine transaction and not at all a sham, collusive or colorable transaction. Thus, there is no merit in the addition of Rs.3,45,20,508/- made by the AO. The addition is therefore deleted. Appellant gets equivalent relief. Related grounds succeed.
Legal Grounds 1.1, 1.2, 3.1, 4.1 and 5.1
18. Now I turn to the legal grounds based on the ratio of Saumya Construction (supra) raised by the appellant. As discussed at appropriate places (supra), I have categorically held that there is no credible material, seized or otherwise, in possession of the AO justifying any of the adverse observations made, adverse inferences drawn, adverse findings given or for any of the additions made by her. After hearing to vehement arguments of the AR, after perusing the written submissions filed by the appellant, and after giving thoughtful consideration to the same, I may tabulate the addition-wise seized documents referred to by the AO for supporting the additions made by her, and thereafter may adjudicate the related legal grounds 2.1 to 5.1 before finally adjudicating Grounds 1.1.and 1.2.
Addition of Rs.4,59,70,854/- (Ground 2.1):
The following seized documents have been relied upon by the AO in the assessment:
Sr . No . P a g e No . o f De sc rip tio n o f C rux of Sub m i ss io ns by the As s tt. d o cum en t AR Ord er 1 2, 7-10 Off e r L et te r d a t e d No e vid en ce o f p a y men t o f 2 8 /8 /2 0 0 7 mo r e th a n a g re ed to a mo u n t. E x ecu to r y a n d co n d it io n a l d o cu men t , n o evid en tia r y va lu e o n ce fin a l SPA d a ted 2 6 /9 /2 0 0 7 e xecu ted .
2 5 V a r io u s Ma i l No p a r ti cu la r a d ve r se
exch a n g e s - A n n e xu r e co n ten t.
A- 10 andA-7
3 13 E - ma i l co mmu n i ca t io n R efe r s to " st ro n g f eel in g s"
d a ted 9 /8 /2 0 0 7 f ro m th e o f a p p el la n t a b o u t d ea l a t
a p p ella n t to V ika s " 4 5 cro re s" . No e vid e n ce
Da w ra of u n a cco u n ted
tra n sa c tio n , or
IT(SS)A Nos. 318, 319, 321 & 322/Ahd/2017
(DCIT vs. Smt. Seema Dalmia & Ors.) - 91 -
u n a cco u n ted r ece ip t or
p a ymen t.
4 14 E - ma i l co mmu n i ca t io n A p p el la n t' s me re o p in io n
d a ted 1 3 /8 /2 0 0 7 f ro m th a t " 4 5 + 1 5 " i s a g o o d
th e a p p ella n t to V ika s va lu a t io n . No
Da w ra evid en ce of
u n a cco u n ted t ra n sa ct i o n ,
rec eip t o r p a y men t .
5 15 E - ma i l co mmu n i ca t io n " Kh a n n a o f Lu p in h a s
d a ted 1 6 /8 /2 0 0 7 f ro m co me u p to 4 4 " , No
th e a p p el la n t to A ja y evid en ce o f u n a cco u n ted A g a r wa l tra n sa c tio n , rec eip t or p a ymen t.
18. Based on the above, it is the contention of the Ld. AR, as discussed in para 5 above that there is no incriminating seized material in possession of the AO so as to enable him in making addition in this unabated assessment which had attained finality before the date of search. Having perused the assessment order and having considered the relevance of these purportedly "incriminating material", and having also noted that even till the completion of the assessment framed by the AO, there is no other credible and independent material brought on record by the AO to support his finding that in fact Rs.42.5 crores has been received as consideration towards transfer of entire shareholding in RLL, I have come to a considered conclusion that none of the above five seized documents would qualify to be "incriminating". As rightly submitted by the AR, the plain dictionary meaning of "incriminating" is "to be making someone appear guilty of a crime or wrongdoing". Thus, the document to be incriminating so as to be validly conferring jurisdiction u/s 153A or 153C for triggering AO's "interference" has necessarily to record a "transaction"
which at least prima fade indicates unaccounted/cash/doubtful transaction. The document relied upon by the AO as pertaining to the appellant and treated by her as incriminating are unquestionably not incriminating in as much as none of them record any completed or proper transaction, leave aside such transaction pointing towards guilt or wrong-doing or act of tax evasion of appellant. As already held by me, the e-mail communications and the Offer Letter of Lupin are themselves futuristic and tentative in nature and probabilistic in tenor. In my considered opinion none of the documents are also capable of remotely evidencing any meaningful wrongdoing, accomplished or even planned, by the appellant. If such communications evidencing the negotiations-stage bargaining or contemplations about a future deal are taken to be within the ambit of being "incriminating", without insisting on prima facie evidence of unaccounted transaction on such documents, all and every document seized during the course of a search pertaining to all recorded and duly disclosed transactions would also fall within the category of being "incriminating". My perusal of the decisions including Juriodictional HC Decisions in Saumya Construction IT(SS)A Nos. 318, 319, 321 & 322/Ahd/2017 (DCIT vs. Smt. Seema Dalmia & Ors.) - 92 -
(supra) and Jayaben Ratilal Sorathia (relied upon in Saumya) and other decisions on the issue enlighten me that Hon. HCs and Tribunal have narrowed or 'read down' the scope of AO's power u/s 153A primarily on the basis of fundamental principle that "unabated assessments" have attained finality before the search which can't be arbitrarily and lightly unsettled by the AO merely because there is search action u/s 132 and also merely because the assessment needs to be re-framed u/s 153A as statutorily required. The "triggering" or "enabling" seized material in this behalf, therefore, by necessary implication, must necessarily Justify, on its own face, revisiting the issue by the AO. That only would, in other words, be "incriminating", for validly conferring jurisdiction on the AO while re-framing an "unabated" assessment u/s 153A for making a particular addition. Presently, the "seized documents"
relied upon by the AO to "interfere" with an already concluded issue are devoid of any categorical evidence of any unapprovable (planned or concluded) action or of any unaccounted or unaccountable transaction of the appellant and are therefore dumb at best and wholly irrelevant at worst. Had there been in AO's possession a seized record of actual receipt/payment of or even an agreement/undertaking to pay/receive in future an additional and unaccounted amount of even a single rupee in connection with the transaction, or of a defrauding design or deal, that would have indeed conferred a valid jurisdiction on AO to "interfere"
and undertake necessary enquiry and make the addition. Another test would be that "that relevant document which was not produced or which might not be produced before the AO during original assessment" could rightly be treated as "incriminating". In my considered opinion, these internal communications undertaken at negotiation stage have become redundant and irrelevant once final transactions have taken place, and therefore whether or not the same were not produced or might not be produced before the AO is an irrelevant consideration. Moreover, when a businessman or his associates enter into hundreds of mail-communications, which of them "might not be produced" is an unending and an equally meaningless enquiry. The AO, therefore, doubtlessly and positively must show incriminality in the very seized documents relied upon by her to validate her "getting triggered" for unsettling a concluded issue. Finally, my findings on merit (supra) would also indicate that I have already held these documents to be irrelevant and consequently and obviously therefore to be not incriminating. Thus, I agree with the Ld. AR that AO has exceeded her authority, as explained in Saumya Construction (supra) by Gujarat High Court, in "interfering" with an already concluded issue and in making the addition on an issue for which there was no relevant and credible enabling incriminating seized document in her possession. Accordingly, ground no.2.1 succeeds.
Capital Gains v. Business Income; Rs.11,62,69,907/-(Ground 3.1) IT(SS)A Nos. 318, 319, 321 & 322/Ahd/2017 (DCIT vs. Smt. Seema Dalmia & Ors.) - 93 -
19. The only seized document referred to by the AO for holding that the income is to be taxed under the head 'Business Income' and not under the head 'Capital Gains' is the share purchase agreement (SPA) dated 26/9/2007 between the appellant (sellers ) and Lupin Ltd. The appellant, in the returns of income filed at appropriate time, disclosed this very transaction as depicted in SPA dated 26/9/2007 for disclosing the relevant Capital Gains. It does not escape the notice of the reader of the assessment order that AO has simply analyzed various clauses of SPA and section 28(va) of the Act before coming to her conclusion recorded by her in points 1 to 4 of page 20 of the assessment order. The AO herself has noted on page no.23 of the order that not only the appellant and other sellers have disclosed these very transactions in the return of income but the appellant has also claimed deductions u/s 54EC/54F and also claimed set off of capital losses. The issue to be decided therefore is that can the SPA, relied upon exclusively by the AO for making the addition, be held to be "incriminating". In my considered opinion, the transaction of sale of shares to Lupin in pursuance to SPA dated 26/9/2007 has already been disclosed in the return of income by the appellant. It is impossible to hold that there is anything incriminating in the very SPA which has been acted upon and disclosed in the return of income before the date of the search by the appellant. It is also impossible to hold that this fundamental document would not have been or might not be produced before the AO. Thus in my considered opinion, there is nothing incriminating seized during the course of the search which can trigger the action of the AO in proceeding in changing the head ot income from Capital Gain to Business Income. Thus, I am inclined to allow ground no.3.1 also.
Addition of Rs.34,59,55,100/- as Unaccounted Investment on purchase of shares of RL (Ground No. 4.1)
20. The incriminating documents referred to by the AO are as under:
Sr . No . P . No . o f t he De sc rip tio n o f C rux o f sub m i ss io ns b y A R a s se ssm e nt the d o c um ent o rd e r 1 24 S h a reh o ld e rs ' F o r ma l d o cu men t.
a g ree men t d a t ed No th in g su sp i cio u s. Dec la r ed 6 /6 /2 0 0 3 vo id by A rb it ra tio n a wa rd d a ted 5 /6 /2 0 0 7 . No e v id en t ia ry va lu e.
2 24 S h a reh o ld e rs ' A s a b o ve.
a g ree men t d a t ed
3 1 /8 /2 0 0 5
24 S h a reh o ld e rs ' A s a b o ve.
a g ree men t d a t ed
1 5 /1 2 /2 0 0 6
IT(SS)A Nos. 318, 319, 321 & 322/Ahd/2017
(DCIT vs. Smt. Seema Dalmia & Ors.) - 94 -
4 32 E - ma i l of M il in S eek s an a d v ice on th e
Meh ta d a t ed " stru ctu re" o f fu tu re tra n sa c tio n .
1 /7 /2 0 0 7 No th in g fi sh y o r " in c r im in a tin g " .
5 35 No t e o n No n eg a ti ve in fe re n ce or
re st ru c tu rin g o f R L su sp ic io n p o s sib le.
6 3 6 ,3 7 V a lu a t io n E vid en ce th a t ma rk et va lu e o f
Ce r tif ica tio n K.A . sh a re s o f R L is h ig h e r t h a n R e. 1
3 1 ia h a Co . p er sh a re, wh ich in fo r m a tio n th e
AO a lr ea d y h a s. No th in g
in c ri min a tin g to tr ig g e r
" in ter fe ren ce" .
20.1 The Ld. AO has held these documents to be "incriminating"
enough so as to justify the addition in unabated assessment being retrained by her n/s 153A. My perusal and examination of these seized documents, as held by me in discussion on merits of the addition, do not lead me to a conclusion that the documents are "incriminating in nature" to begin with. As such three shareholders' agreements are entered into between the two promoter groups and are routine in nature. Nothing at all can be considered to be incriminating in them unless a twisted, partial and purported view about the same is taken, as has been done by the AO. Obviously there is nothing to remotely suggest in these shareholder agreements that the transaction of purchase of shares of RL at Re.1, which has been complementarity shown by the appellant and Shri Anil Patel in their respective returns of income before the search, and even examined by AO of the appellant in subsequent Assessment Year and by AO of ARP by a co-ordinate AO, is "colourable" or that there is anything wrong, understated or fraudulent. Moreover, in light of the Arbitration Award dated 5/6/2007 which also was submitted to/considered by the AOs of Anil Patel and of other Group members in assessments u/s 143(3) before the search, these SHAs were also declared void vide clause 15 of the Award, thus stripping these SHAs of any evidentiary value, which fact was also stated u/s 132(4) and in communication to DDIT dated 6/6/2013 and 1/7/2013 (PBP No. 37-48). These SHAs have nothing in the nature of being "incriminating" in them- selves so as to "trigger" AO's jurisdiction in re-visiting the issue. Similarly, the e-mail from Shri Milin Mehta is clearly titled "Case for Opinion". No reference to any suspicious or unaccounted transaction undertaken or likely to be undertaken is found in the said e-mail. I myself have also found it intriguing as to how also note on restructuring (page 35 of assessment order) is relevant and how also the certificate of K. A. Shah dated 2/8/2007 indicates anything except the fact that "true value" of the share received on transfer by the appellant is more than Re. 1 per share, which fact is not only wholly irrelevant, the same is also loudly and patentl y indicated in the return of income by the appellant at appropriate time before search. I do not think the documents which show the "true value" to be more than the transacted consideration IT(SS)A Nos. 318, 319, 321 & 322/Ahd/2017 (DCIT vs. Smt. Seema Dalmia & Ors.) - 95 -
without simultaneously showing that a higher consideration than the transacted consideration of Re.1 has changed hands can, with regard to transaction of purchase of shares by the appellant, be regarded as incriminating. I agree with the Ld. AR therefore, that the transactions showing the "true value" of the shares of RL at Rs.80, Rs.94, Rs.318 etc. was already disclosed in the returns of income and in the Balance Sheet of RL and that there is no incriminating seized material relied upon by the AO which can be said not to be already with the Department or which might not be produced by the appellant. I also agree with the Ld. AR that there is nothing incriminating in these documents so as to validate the assumption of jurisdiction by the AO in "interfering" with the closed and concluded issue and making the addition. As such Saumya Construction (supra) is squarely applicable and in absence of any meaningfully incriminating seized material in possession of the AO, the AO could not have made this addition of Rs. 34,59,55,100/- in this "unabated assessment". Ground No. 4.1 stands allowed.
Addition of Rs.3,45,20,508/- as Unaccounted Investment on purchase of shares_of RLL (Ground 5.1)
21. The only seized document referred to by the AO while making the addition is shareholders' agreement dated 30/6/2007, Referring to the contents of the said shareholders' agreement, the Ld. AO has observed that the agreement talks about "the equal terms and price to be fixed for transfer of shares to the other group and to the third party". Thus, as per the AO, the shares, should have been transferred on the same terms and at the same price as was done in the case of shares transferred to Lupin. The AO has thereafter referred to and analyzed various clauses of the shareholders' agreement to conclude that as per clause 7.3C of the said agreement the price to be realized by Shri Anil Patel could not have been less than the price at which shares have been offered to Lupin. After thorough and repeated perusal of the only seized document namely shareholders' agreement dated 30/6/2007, I am unable to persuade myself to see any "incriminality" in the said shareholders' agreement. The very issue has been probed and considered in assessment u/s 143(3) of Shri Anil Patel before the date of the search and nothing adverse has been noted by the AO of Shri Anil Patel. In any case, the shareholders' agreement in itself is essentially a document which was not only considered by the AO of Shri Anil Patel, the same can by no stretch of imagination be held to be a document which might not be produced if called for by the AO. Moreover, the document itself, obviously governs the future relationship of two promoter groups inter se and vis-a-vis RLL. There is no record in this SHA of any unaccounted transaction undertaken or planned or of any payment of receipt not recorded or not likely to be recorded in books or of any conspiracy or collusion. Even without this IT(SS)A Nos. 318, 319, 321 & 322/Ahd/2017 (DCIT vs. Smt. Seema Dalmia & Ors.) - 96 -
document, it is a valid curiosity on the part of the AO to wonder as to why the transaction between the appellant and Anil Patel should be at Re. 1 per share as against similar transaction within short time thereafter with Lupin at roughly Rs.154.37 per share. But such curiosity, with or without the seized document relied upon by the AO (SHA dated 30/6/2007), does not, in my considered opinion, confer jurisdiction on AO u/s 153A to revisit a concluded issue in this "unabated assessment". Validly incriminating document authorizing the AO in revisiting this issue in assessment u/s 153A, in my considered opinion, would be a loose paper/document/diary or any such inherently incriminating material, or which records some other dubious and circuitous arrangement, which prima facie indicate that consideration, in cash or in kind, of an amount more than at Re.l per share has been paid or planned. The shareholders' agreement relied upon and considered by AO to be incriminating is a bald document with regard to any incriminality and the AO has merely used the document to argue that her conjecture that appellant "must have paid" Rs.3,45,20,508/- from unaccounted sources is well-founded. I therefore hold that there is no incriminating material in possession of the AO so as to authorize her to re-visit the issue of purchase of shares of RLL by the appellant at Re. 1 and to make the impugned addition while framing re-assessment u/s 153A in this assessment which had attained finality before the date of the search and had therefore remained unabated within the meaning of second proviso to section 153A. In other words, the AO indeed exceeded her authority u/s 153A while making the addition de hors any incriminating seized material enabling her in this behalf, and thus violated the law as laid down by Jurisdictional High Court in Saumya Construction (supra) and other Authorities. Consequently ground no.5.1 is also allowed.
22. Thus, while allowing ground no.2.1, 3.1, 4.1 and 5.1 as above, I have held that there is no "incriminating material" in possession of the AO so as to enable her in law to re-visit the relevant issues in unabated assessment being reframed by her u/s 153A. As none of the additions as made by the AO are supported by any incriminating seized material, the AO was duty-bound to merely "reiterate" the total income of the appellant which had attained finality before the date of the search. Accordingly, ground no. 1.1 and 1.2 are also allowed.
12 Now, Revenue has come before us by way of second statutory appeal.
IT(SS)A Nos. 318, 319, 321 & 322/Ahd/2017 (DCIT vs. Smt. Seema Dalmia & Ors.) - 97 -
13. We have heard both parties and perused the material available on record.
13.1 The Assessee transferred the shares of RLL to Lupin vide Share Purchase Agreement ("SPA") dated 26-9-2007 at Rs.36.63 crores (page 112-156). The Deputy Commissioner of Income Tax, Central Circle-2, Vadodara ("the AO") has treated the difference between the offer letter and the final price as per the SPA as unaccounted income (Rs.42.50 crores less Rs. 36.81 crores).
13.2 It is argued by the learned AR that the initial offer was subject to various adjustments. The working of sale consideration and adjustments made to the initial offer is as under:
Particulars Amount (Rs. Amount (Rs. Per share value in Crores) in Crores) (No. of Shares) 23,84,783 Consideration offered as per letter dated 28- 42.50 178.21 8-2007 Less: Adjustments Bad inventory 3.096 Loss for year till date 1.04 Transfer of Land 0.70 Recovery of Fees to Yes 0.85 Bank Adjustment on account of 0.1805 5.8665 Supplementary Agreement Net Consideration receivable as per Share 36.6335 153.61 Purchase Agreement dated 26-9-2007 13.2.1 Detailed explanation of all the above adjustments has been given in the original submission dated 17-11-2016 from Para 50 to 57. The sale consideration was fixed after considering the above adjustments. The IT(SS)A Nos. 318, 319, 321 & 322/Ahd/2017 (DCIT vs. Smt. Seema Dalmia & Ors.) - 98 -
ld. AO has completely ignored these adjustments and adopted the initial offer value.
13.2.2 The Assessee in the submissions made before the ld. AO had explained each and every adjustment with corroborative evidences.
13.2.3 Issue regarding bad inventory, we can see that in the offer letter, in point no iii) of para 2, it is mentioned that the Offer Value shall be subject to adjustments on account of non-moving/unrealizable inventory, unrecoverable debts, receivables that are outstanding for a period of 180 days and are found unrecoverable/non-saleable in mutual discussions with management to the satisfaction of Lupin, and any other assets that are susceptible to diminution in value. The statement showing non-moving inventory as on 31-08-2007 was filed before the ld. AO during the course of search assessment (page no. 140 to 142). The list of the said inventory with the values thereof also finds specific mention in the Share Purchase Agreement itself (Page No. 112 to 156). The ld. AO has not controverted any of the submissions / factual aspect of this adjustment. In view of the same the adjustment on account of value of non-moving inventory amounting to Rs. 3,09,61,711 is allowed.
13.4 Issue regarding loss for year till date, it is evident that this adjustment has been made on account of loss of RLL for the period ended 31-08-2007. As per the profit and loss account for the period ended 31-08- 2007, the loss of RLL amounts to Rs. 103.74 Lacs (Pg. No. 178). This loss has been reduced from the initial offer value of Rs. 42,50,00,000. This adjustment has not been controverted by the ld. AO.
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13.5 Issue regarding transfer of Land, it is stated that RLL is situated at Dabhasa. The Plant of RLL was situated on a piece of land and adjacent to the said land was another land which belonged to RL. At the time when the particulars of the Dabhasa plant was given, the land which belonged to RL was also included in the proposal and accordingly, the price of Rs. 42.50 crore was arrived at. The details of the lands included in the initial offer price are as under:
Particulars Block No. Value as per Sale Pg. No. Deed Lands at Dabhasa 48 49,50,420 157 Land at Dabhasa 66 8,32,600 157 Land at Dabhasa 60 12,16,970 329 Total 69,99,990 13.6 The initial offer price was computed at Rs. 42,50,00,000 on 28-08-
2007 (Pg. No. 107). Thereafter, a due diligence process and a valuation of assets of RLL was carried out. In the said process, it was noticed that the lands at Dabhasa carrying Block No. 48, 66 and 60, were included in the assets of RLL while computing the initial offer price but did not include the said land. Since the offer included the said piece of land also, RL did the conveyance of these lands to RLL. This resulted into an amount payable to RL by RLL amounting to Rs. 70.00 lacs. This increased the liability of RLL and accordingly, the purchase price was reduced by the said sum. It is submitted that RLL discharged the said liability to RL.
13.7 Issue regarding fees to Yes Bank, it is fact that the Assessee had availed services of Yes Bank for facilitating transfer of shares to Lupin Ltd. Lupin Ltd had incurred expenditure in regards to fees to Yes Bank on behalf of the Assessee, for availing these services. Hence, the amount of fees amounting to Rs. 85 Lacs incurred by Lupin Ltd has been recovered IT(SS)A Nos. 318, 319, 321 & 322/Ahd/2017 (DCIT vs. Smt. Seema Dalmia & Ors.) - 100 -
by way of reducing the same from the initial offer value. Copy of the bill raised by YES Bank is attached at page no. 341 of the paper book. It is pertinent to mention that the ld. AO has doubted that no services were provided by Yes Bank without even appreciating that the AO herself relied on the emails which are exchanged by the person (Mr. Vikas Dawra) working in Yes Bank and therefore this contention of the AO is devoid of any merit and merely a product of suspicion.
13.8 Supplementary Agreement to Share Purchase Agreement Rs. 18,05,764, it is submitted that the ld. AO ignored the Supplementary Agreement to the Share Purchase Agreement dated 26-9-2007. Refer page 186 to 190 for the Supplementary Agreement to the Share Purchase Agreement dated 26-9-2007. Vide the said agreement a net downward adjustment of Rs.18,05,764 was made by Lupin Limited to the sale consideration on account of amount of Rs. 29,01,236 payable for sale of bad inventories and Rs. 47,07,000 recoverable from the shareholders on account of recovery for warranties. Therefore, the sale consideration per share after considering the adjustment of Rs.18,05,764 would work out to Rs. 153.61. Hence, the value per share of Rs. 153.61 would have to be considered and the ld. AO has incorrectly adopted Rs. 154.37 per share as the alleged price per share.
13.9 After considering the impugned order and hearing both sides, we therefore hold that the actual sale consideration for transfer of shares of RLL to Lupin Limited is Rs. 36.63 crores and not Rs. 42.50 crores. Considering the same, the ld. CIT(A) has correctly deleted the addition made by the ld. AO. We do not find any infirmity in the order of learned CIT(A). Thus, this ground of the Revenue is dismissed.
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13.10 The ld. AO has also referred to some e-mails exchanged between the Assessee and various finance department head of RL in which offers made by some other interested parties for acquiring 100% stake of RLL have been discussed. It is submitted that e-mails referred to by the AO are irrelevant. It is submitted that once the share purchase agreement dated 26- 09-2007 has been executed and even accepted by the ld. AO, the emails, discussing various potential considerations is of no relevance and same cannot be considered as incriminating in nature.
13.11 Following is the table showing irrelevance of the e-mails relied upon by the ld. AO:
Pg. No. of Material relied Date of Material Assessment How it is non-Incriminating upon by the AO Order Offer Letter is redundant once the final share purchase agreement is executed on 26- Initial Offer Letter 28-08-2007 2, 7-10 09-2007. It is an executory and conditional document, not binding on the Assessee.
No evidence of unaccounted
transaction. Refers to "strong
E-mail from
feelings" of the Assessee.
Assessee to Vikas 09-08-2007 13
Further, the email is even
Dawra (Yes Bank)
before Initial Offer Letter and
hence redundant.
No evidence of unaccounted
E-mail from transaction. Merely an opinion
Assessee to Vikas 13-08-2007 14 of Assessee. Further, the email
Dawra (Yes Bank) is even before Initial Offer
Letter and hence redundant.
No evidence of unaccounted
E-mail from
transaction. Further, the email
Assessee to Ajay 16-08-2007 15
is even before Initial Offer
Agrawal
Letter and hence redundant.
13.12 We are of the opinion that considering the above, it can be appreciated that none of the documents relied upon by the ld. AO are IT(SS)A Nos. 318, 319, 321 & 322/Ahd/2017 (DCIT vs. Smt. Seema Dalmia & Ors.) - 102 -
incriminating in nature and therefore no addition can be made based on such documents. Hence, it is submitted that ld. CIT(A) has correctly deleted the addition of Rs. 11,62,69,907 on account of alleged unaccounted consideration.
13.13 We hold that the ld. CIT(A) has correctly deleted the addition considering the decision of Hon'ble Gujarat High Court in the case of PCIT v. Saumya Construction (387 ITR 529) wherein it has been held that no addition can be made in an assessment u/s 153A, if no incriminating material is found during the search. In the present case, the decision of the Hon'ble Gujarat High Court is squarely applicable as no incriminating material found during the course of the search. Hence, the ld. CIT(A) has correctly deleted the addition made by relying on the decision of Hon'ble Gujarat High Court.
13.14 Grounds No: 1(b)- Income from transfer of RLL shares to Lupin Ltd. treated as Business Income instead of Capital Gains 13.14.1 The ld. AO treated the gains arising from transaction on sale of shares of RLL to Lupin Ltd as business income instead of income under the head capital gains and consequently also denied the of benefits indexation, deduction u/s. 54EC, 54F and set off of capital loss.
13.14.2 As we can see at the time of demerger of RLL from Rubamin Limited ("RL"), the issue was examined by the ld. AO as part of the regular assessment in the case of the Assessee for AY 2007-08, and the ld. AO held that the said shares of RLL and also RL are "capital assets". Copy of the return of income, computation of total income, the reply submitted by the Assessee on this issue and assessment order is attached at page nos. 378 to 396.
IT(SS)A Nos. 318, 319, 321 & 322/Ahd/2017 (DCIT vs. Smt. Seema Dalmia & Ors.) - 103 - 13.14.3 As we can see that the issue of the nature of income arising on
account of transfer of shares had come up for verification before the AO in the case of the Assessee's wife for A.Y. 2008-09 itself and the AO had held the gains as Capital gains. A copy of the return of income, computation of total income, the reply submitted and assessment order in case of Smt. Seema A Dalmia is attached at page nos. 370 to 377.
13.14.4 It is argued that the Finance Act, 2012 inserted explanation to Section 2(14) of the Act with retrospective effect from 1-4-1962, thereby clarifying the definition of "Capital Asset". The explanation to section 2(14) clearly provides to include right of management or control in an Indian Company in the definition of capital asset. The explanation is clarificatory in nature and though introduced by the Finance Act, 2012, has retrospective effect from 01-04-1962. The Assessee on sale of shares, has transferred right of management and control of RL to the buyer and consequently transferred a capital asset to the buyer. Hence, the gains arising on transfer of capital asset, being right of management and control, shall be taxable under the head capital gains.
13.14.5 The AO has invoked provisions of Section 28(va) of the Act to treat gain on transfer of RLL shares as business income. Your kind office will appreciate that clause (i) of proviso to section 28(va) provides that section 28(va) shall not apply in case of any sum received or receivable in cash or kind, on account of transfer of the right to manufacture, produce or process any article or thing or right to carry on any business or profession, which is chargeable under the head "Capital gains". It is submitted that the right of management and right to carry on business is squarely covered under the definition "Capital Asset" as per explanation to Section 2(14).
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Therefore as per clause (i) of proviso to section 28(va), the income cannot be treated as business income u/s 28(va).
13.14.6 Our attention was drawn to the facts that Section 50 B of the Act duly provides that sale of the undertaking or division would be treated as sale of the capital asset and taxed accordingly. It is submitted the term undertaking is defined in Explanation 1 to Section 2 (19AA) which mention that undertaking means a business as a whole. This would include all intangible and management control. It is submitted that when the entire undertaking is considered to be a capital asset, the shares of a company which owns industrial undertaking has also to be considered to be a capital asset and sale therefore should be charged only to capital gains.
13.14.7 Learned AR alternatively argued that even if section 28(va) of the Act is invoked, the consideration which is attributable to the non- compete covenant only could be taxed as business income and not otherwise. In this connection we have to invite your kind attention to the Initial offer letter issued by the Lupin Limited. Careful verification of the Initial offer letter would reveal that there was no non-compete covenant. Lupin Ltd. had agreed to purchase for the offered consideration without the said non-compete covenant and the Assessee had agreed to sell the same at the said consideration. However, the said covenant was introduced for the first time in the SPA and no additional consideration for thereof was paid. Accordingly, no part of the consideration could be attributed to the non-compete covenant. Therefore, no part of the income can be treated as business income. Hence, it is held that the ld. CIT(A) has correctly treated the income from transfer of shares of RLL as income under the head "Capital Gains".
IT(SS)A Nos. 318, 319, 321 & 322/Ahd/2017
(DCIT vs. Smt. Seema Dalmia & Ors.) - 105 -
13.14.8 In view of the above, we hold that the ld. CIT(A) has correctly
deleted the addition considering the decision of Hon'ble Gujarat High Court in the case of PCIT v. Saumya Construction (387 ITR 529) wherein it has been held that no addition can be made in an assessment u/s 153A, if no incriminating material is found during the search. In the present case, the decision of the Hon'ble Gujarat High Court is squarely applicable as no incriminating material found during the course of the search. Hence, we hold that ld. CIT(A) has correctly deleted the addition made by relying on the decision of Hon'ble Gujarat High Court.
13.15 Now, we come to issue regarding alleged unaccounted investment on transfer of RL shares by Anil R Patel ("ARP") to the Assessee.
13.15.1 The AO has held that the Assessee has understated the consideration paid by him, for purchase of shares of RL from ARP. The AO adopted the rate of Rs.318.39/- per share as the consideration paid for the transfer of shares of RL and computed the consideration paid at Rs. 34,70,45,100 (10,90,000 x Rs.318.39). Consequently, the AO made addition of Rs. 34,59,55,100 (Rs.34,70,45,100 - Rs.10,90,000) to the income of the Assessee.
13.15.2 The Assessee and ARP had entered into an arbitration agreement to resolve the differences pertaining to shareholding in RL. ARP has given a detailed account of circumstances that existed due to which he and the Assessee entered into arbitration. In the arbitration proceedings, all the above mentioned facts were taken into cognizance, and accordingly direction was given to the transferor to transfer the shares to the Assessee at Re. 1 per share. It is submitted that the price of Re. 1 has been ruled by the arbitrator keeping the nature of transaction and the above mentioned IT(SS)A Nos. 318, 319, 321 & 322/Ahd/2017 (DCIT vs. Smt. Seema Dalmia & Ors.) - 106 -
circumstances in mind. Since, this is an inter transfer of shares, and the main purpose of the said transaction was to change the shareholding of the company, the price of Re. 1 was adjudged by the arbitrator. There was no intention of the shareholders to enrich themselves on the sale of their shares in RL.
13.15.3 As we can see that all the above facts were also presented at the time of regular assessment of ARP for the year under consideration, in which the then AO confirmed the returned income of ARP. Same are part of the assessment order at page no. 419 to 420.
13.15.4 Surprisingly, the AO has on pure assumptions rejected the price of Re. 1 for transfer of shares of RL and as further alleged that the shares of RL were transferred at an assumed price of Rs. 318.39 per share. It is kindly submitted that the transactions referred to by the AO i.e. allotment of shares to India Advantage Fund and under ESOP are commercial transactions of RL and same are duly accounted for in the Books of Accounts of RL and same does not take away the fact that ARP transferred shares of RLL at Re. 1 on account of an Arbitral award. It is submitted that all the facts go on to prove that the actual transaction has taken place between the Assessee and ARP at Re. 1 per share and therefore the market price or fair value of the shares are not relevant consideration.
13.15.5 The AO in the assessment order has alleged that the Arbitration award is colorable device adopted by the Assessee to evade payment of tax. It is submitted that the Arbitration order dated 05-06-2007 is one of the documents which were seized / found / produced during the search / post search proceedings. The Assessee during the course of search proceedings has given a statement on oath which is attached from pg. no. 10 to 20. The Assessee has submitted the Arbitration award/order by Shri IT(SS)A Nos. 318, 319, 321 & 322/Ahd/2017 (DCIT vs. Smt. Seema Dalmia & Ors.) - 107 -
Mihir Thakur dated 05-06-2007 in his statement dated 28-04-2013 (Page. No. 15). Relevant extract of the statement of the Assessee is reproduced as follows:
"Q.30 In response to question no. 33 to 37 asked during the course of recording of statement u/s. 132(4) during the course of search proceedings at your residence on 27.4.2013, you had furnished information in respect of shares of Rubamin Laboratories Limited purchased from Anil R Patel. Please explain how the value of shares was determined and the transaction was executed. Also substantiate any information furnished by you during the course of statement dated 27.4.2013.
Ans. 30 I am submitting the Arbitration Award by Shri Mihir Thakur who is a senior lawyer in Ahmedabad. In my earlier statement dated 27-04- 2013, I had mentioned him as a retired judge which was stated by mistake. This award clearly state the sequence of events because of which Dalmia's were given 60% shareholding."
13.15.6 On the perusal of the above, we have noticed that in the statement recorded during the course of search itself the Arbitration Award was referred for transfer of shares. This itself shows that the transfer of shares to the Assessee by ARP was under special circumstances and based on the order of the Arbitrator. We therefore submit that the allegation of the AO that the award was a colorable devise without bring any material suggesting so is purely based on imagination and far from truth.
13.15.7 Based on the above statement, the Assessee on oath has clearly confirmed the existence of arbitration award/order which gave clear statutory direction to the transferor to transfer the shares of RL at Rs. 1 per share. Further, a statement recorded u/s. 132(4) being spontaneous is considered to true and correct unless pointed out otherwise.
13.15.8 As we can see that against the above, the AO has not brought on record any material to show how the Arbitration Award is colorable.
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We therefore submit that the allegation of the AO are to be rejected and the issue may please be decided in favour of the Assessee.
13.15.9 It is fact that no provision in any law, permits arbitrary adoption of value of unquoted shares. The Assessee has given clear justification and reasoning as to arrival of value of shares of RL at Rs. 1 per share. Further, the Assessee has also submitted the relevant documents directly related to the determination of value of shares at Re. 1 per share. In contrast, the AO has not furnished any evidence or material to substantiate his claim of valuing the shares transferred to the Assessee at Rs 318.39.
13.15.10 The learned AR relied on following decisions:
a. CIT vs. George Henderson and Co. Ltd. [1967] 66 ITR 627 (SC) b. CIT vs. Gillanders Arbuthnot & Co. 87 ITR 407 (SC) c. CIT vs. Ballabgarh Refractories Ltd. [2005] 144 Taxman 781 (Delhi) d. D.S. Bist & Sons vs. Commissioner of Income [1984] 149 ITR 276 (Delhi) 13.15.11 We hold that the ld. CIT(A) has correctly deleted the addition considering the decision of Hon'ble Gujarat High Court in the case of PCIT v. Saumya Construction (387 ITR 529) wherein it has been held that no addition can be made in an assessment u/s 153A, if no incriminating material is found during the search. In the present case, the decision of the Hon'ble Gujarat High Court is squarely applicable as no incriminating material found during the course of the search. Hence, the ld. CIT(A) has correctly deleted the addition of Rs.34,59,55,100/- made by relying on the decision of Hon'ble Gujarat High Court.
IT(SS)A Nos. 318, 319, 321 & 322/Ahd/2017 (DCIT vs. Smt. Seema Dalmia & Ors.) - 109 -
13.16 Now, we come to issue regarding alleged unaccounted investment on transfer of RLL shares by ARP to the Assessee 13.16.1 The AO has contended that the Assessee has not correctly declared or disclosed the consideration paid by him, for purchase of shares of RLL from ARP, and there is understatement of consideration. The AO adopted the rate of Rs. 178.21/- per share as the consideration paid for the transfer of shares of RLL and computed the consideration paid at Rs. 3,47,15,308 (1,94,800 x Rs. 178.21). Consequently, the AO has made addition of Rs. 3,45,20,508 (Rs. 3,47,15,308 - Rs. 1,94,800) to the income of the Assessee.
13.16.2 Therefore, we hold that there is no intention on the part of the Assessee to evade tax, since the Assessee has shown higher capital gain, in view of cost of acquisition of Re. 1 per share and full value of consideration at Rs. 153.61 per share. The Assessee has also paid tax at a higher rate, being applicable on short term capital gain arising on account transfer of shares of RLL to Lupin. Further, the Assessee has explained in detail the reason and circumstances behind the decision of making an internal transfer of shares at a price of Rs. 1 per share in the Ground No. 2.
14. On the other hand, learned D.R. relied on the assessment order and has nothing to controvert the finding of learned CIT(A).
15. Considering the above, since during search no incriminating material was seized or found from the possession of the assessee, we hold that the ld. CIT(A) passed detailed and reasoned order and has correctly deleted the addition of Rs. 3,45,20,508 as income of the Assessee. Thus, order of learned CIT(A) does not require any kind of interference at our end.
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16. In the result, we dismiss the appeal of the Revenue.
17. Since, we have dismissed the appeal of the Revenue in connecting ITA No.322/Ahd/2017
18. Since, we have dismissed the appeal of the Revenue in connecting IT(SS)A No.322/Ahd/2017 (in case of Shri Atul Dalmia) for A.Y. 2008-09, in similar facts and circumstances, therefore, the same shall apply mutatis mutandis in other three appeals.
19. In the result, all captioned four appeals filed by Revenue are dismissed.
This Order pronounced in Open Court on 11/04/2022
Sd/- Sd/-
(WASEEM AHMED ) (MAHAVIR PRASAD)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Ahmedabad: Dated 11/04/2022
True Copy
S.K.SINHA
आदे श क त!ल"प अ#े"षत / Copy of Order Forwarded to:-
1. राज व / Revenue
2. आवेदक / Assessee
3. संबं+धत आयकर आयु-त / Concerned CIT
4. आयकर आयु-त- अपील / CIT (A)
5. 1वभागीय 4त4न+ध, आयकर अपील!य अ+धकरण, अहमदाबाद / DR, ITAT, Ahmedabad
6. गाड: फाइल / Guard file.
By order/आदे श से, उप/सहायक पंजीकार आयकर अपील!य अ+धकरण, अहमदाबाद ।