Income Tax Appellate Tribunal - Delhi
Ito, New Delhi vs M/S Core Agencies Pvt. Ltd., New Delhi on 14 July, 2017
1
I.T. Appeal Nos. 1590 & 1905/Del/2011
Assessment Years : 1996-97 & 1997-98.
IN THE INCOME TAX APPELLATE TRIBUNAL
[ DELHI BENCHES: "B" NEW DELHI ]
BEFORE SHRI I. C. SUDHIR, JUDICIAL MEMBER
AND SHRI L. P. SAHU, ACCOUNTANT MEMBER
I.T. Appeal Nos. 1590 & 1905/Del/2011
Assessment Years : 1996-97 & 1997-98.
Income Tax Officer, M/s. Core Agencies Pvt. Ltd.,
Ward : 3 (4), Vs. 401-Padma Tower-II,
New Delhi. 22, Rajendra Place,
N e w D e l h I 110 008.
PAN : AAACC 2712 Q
(Appellant) (Respondent)
Assessee by : Shri Satyen Sethi, Adv.;
Department by : Shri Anil Kumar Sharma, Sr. D.R.;
Date of Hearing : 03.05.2017
Date of Pronouncement : 14.07.2017
O R D E R.
PER I. C. SUDHIR, J. M. :
The Revenue has questioned first appellate order in both the
assessment years on the following common grounds :-
" 1. The ld. Commissioner of Income Tax (Appeals) has
erred on facts and in law in deleting additions of
Rs.4,32,66,830/- (for assessment year 1996-97) /
2
I.T. Appeal Nos. 1590 & 1905/Del/2011
Assessment Years : 1996-97 & 1997-98.
Rs.3,85,55,340/- (for assessment year 1997-98 on account
of valuation of shares held as stock in trade for the
reason that loss was bogus, sham and fictitious, ignoring
that :
a) The assessee company has purchased mainly the shares
of the H.B. Group companies and booked the heavy
losses due to over valuation;
b) The shares of the group companies have remained with
the H.B. Group only along with the funds as the
transactions were made internally amongst the various
group companies and funds have been among them;
c) These transactions were not made through any stock
exchange broker;
d) Reliance is placed on the decision of Hon'ble Supreme
Court in the case of Mc Dowell & Co. Ltd. Vs. CIT 154
ITR 148. "
2. Heard and considered the arguments advanced by the
parties in view of orders of the authorities below, material available
on record and the decisions relied upon.
3. In the appeals preferred by the Revenue, the issue is regarding
valuation of shares and genuineness of the claimed loss. It is second
round of the matter before the Tribunal. The assessee company
3
I.T. Appeal Nos. 1590 & 1905/Del/2011
Assessment Years : 1996-97 & 1997-98.
incorporated on 23.08.1995 is a domestic company in which public
are substantially interested. There are two Directors in the company
holding share capital of the company in the ratio of 50% each. The
total paid up share capital of the company was 200 equity shares
of Rs.10/- each for Rs.2,000/- only. During the year the company had
dealt in sale / purchase of shares. The income received was from
dividend and interest. It declared loss on account of valuation of stock
in trade at the close of the accounting year. The shares which were
purchased at cost were valued at market price at the end resulting
in loss as the market price had fallen.
4. The assessee filed its return of income declaring a loss of
Rs.4,32,66,830/- in assessment year 1996-97 and Rs.3,85,55,340/- in
assessment year 1997-98. The return was processed under section
143(1) at the returned income. Later on case was selected for scrutiny
and assessment was framed under section 143(3) of the Act at an income
of Rs.8,00,000/- in assessment year 1996-97 and at a loss of
Rs.3,5802,524/- in assessment year 1997-98. The assessee went in first
appeal before the ld. CIT (Appeals) and the ld. CIT (Appeals) in
assessment year 1996-97 dismissed the appeal and in assessment year
4
I.T. Appeal Nos. 1590 & 1905/Del/2011
Assessment Years : 1996-97 & 1997-98.
1997-98 while dismissing the appeal enhanced its income by disallowing
the entire loss claimed by the assessee to the tune of Rs.3,85,55,338/-.
The assessee thereafter went in second appeal before the Tribunal and
the Tribunal vide its order common dated 28.09.2007 set aside the issue
pertaining to the valuation of closing stock on account of shares held by
the assessee company to the file of the Assessing Officer with the
direction to reexamine the entire issue with reference to the transactions
involved in other group companies after affording a reasonable
opportunity to the assessee of being heard.
5. The Assessing Officer in the assessment year 1996-97 held that
the claim of loss of Rs.4,32,66,827/- was sham / bogus and it was a
colorable device. In other words, the Assessing Officer disallowed the
claimed loss in its entirety. Similarly in assessment year 1997-98 the
Assessing Officer framed the assessment at the income of Rs.27,52,814/-
as against returned loss of Rs.3,85,55,340/-. The Assessing Officer
disallowed loss of Rs.3,85,55,340/- on account of valuation of shares
held as stock-in-trade, for the reason that loss was bogus, sham and
fictitious. The assessee went in first appeal and the ld. CIT (Appeals) in
the appeal has deleted the addition of Rs.4,33,66,830/- in assessment
5
I.T. Appeal Nos. 1590 & 1905/Del/2011
Assessment Years : 1996-97 & 1997-98.
year 1996-97 and Rs.3,85,55,340/- in assessment year 1997-98 made
on account of valuation of shares held as stock in trade and claimed as
loss. This action of the ld. CIT (Appeals) has been questioned in the
appeals preferred by the Revenue for these two assessment years.
6. In support of the grounds, the ld. Sr. DR has basically placed
reliance on the assessment orders for the assessment years under
consideration. He contended that assessee had purchased the shares of
H.B. Group companies mainly and had booked the heavy losses due to
over valuation. The shares of the group companies remained with the
H.B. Group only along with the funds as the transactions were made
internally amongst the various group companies and funds were among
them. He pointed out that the transactions were not made through any
stock exchange broker. Thus, the ld. CIT (Appeals) was not justified in
deleting the addition without appreciating the above stated facts. He
failed to appreciate that it was colorable device of the assessee to declare
the claimed loss. The ld. Sr. DR referred contents of the assessment
order with the conclusion of the Assessing Officer that the assessee had
simply once again filed copies of all those documents which it had filed
6
I.T. Appeal Nos. 1590 & 1905/Del/2011
Assessment Years : 1996-97 & 1997-98.
before the Assessing Officer during the course of original assessment
proceedings.
7. The ld. AR, on the other hand, submitted that the Assessing
Officer had not complied with the directions of the Tribunal while making
the assessment afresh and has simply copied the original assessment
orders which were subject matter of the appellate authorities. The ld. AR
reiterated submissions made before the authorities below. He referred
the order dated 28.09.2007 of the Tribunal setting aside the issue
pertaining to the valuation of closing stock on account of shares held by
the assessee company to the file of the Assessing Officer with direction to
reexamine the entire issue with reference to the transactions involved in
other group companies.
7.1 The ld. AR submitted that there was a search and seizure
action under section 132(1) in August, 1997 in respect of various
assessees of H.B. Group of companies, its Directors and other
Individuals, investment companies and satellite company plotted by the
group etc. The assessee company is one of the satellite companies
plotted by the main company of the H.B. Group. The block search
assessments covered by the search for the block period are separately
7
I.T. Appeal Nos. 1590 & 1905/Del/2011
Assessment Years : 1996-97 & 1997-98.
pending in respect of all the assessees including the assessee company.
The assessments under consideration have been made on the disclosed
income on the basis of returns of income filed by the assessee for
the assessment years 1996-97 and 1997-98. In the assessment year
1996-97 the assessee had paid up capital of only Rs.2,000/- i.e. 200
shares of Rs.10/- each, but it had purchased shares worth
Rs.14,40,66,545/- and effected sales of shares worth Rs.5,52,37,675/-
which resulted into a loss of Rs.4,32,69,347/-, which was a loss due to
valuation of stock at market value at the end of the year whereas the cost
price was more.
7.2 The ld. AR submitted that the assessee is engaged in the
business of sale and purchase of shares and securities. In the
assessment year 1997-98 the assessee has received various advances,
the net credit balance of which came to Rs.12,23,82,952/-. The
assessment was completed by the Assessing Officer on a loss of
Rs.3,58,02,524/- as against returned loss of Rs.3,85,55,338/-.
7.3 Against the appeal for the assessment year 1996-97 the ld. AR
made following written synopsis :-
8
I.T. Appeal Nos. 1590 & 1905/Del/2011
Assessment Years : 1996-97 & 1997-98.
" 13. Explanation on facts
(i) It is correct that paid up capital was 2000 and shares worth
14.40 crores were purchased and shares worth 5.52 crores
were sold.
(ii) It is also correct that assessee received huge advances and
majority of companies from whom advances were received
were group companies. Details of the advances received with
confirmations and advances given were filed with the
Assessing Officer. It is not the case of the department /
Assessing Officer that -
• parties did not exist. There is no allegation to this effect.
• parties from whom advances were received and the parties to
whom advances were given were assessed to tax.
• fund flow chart filed in response to query raised on12.12.2008 was
incorrect or otherwise improper.
Details of the advances received and advances given with
confirmations are at page 26 to 42 of the paper book.
(iii) During the year assessee purchased shares of following
companies :-
" Sl. No. Name of the company. No. of shares Purchase price
(i) HB Portfolio Leasing Ltd. 734200 & 4,64,71,600
9
I.T. Appeal Nos. 1590 & 1905/Del/2011
Assessment Years : 1996-97 & 1997-98.
908700 (Deb) 5,52,24,472
(ii) Hot Line Glass Ltd. 1000 11,200
(iii) Indo Gulf Industries Ltd. 2350 84,269
(iv) Hot Line Teletube Ltd. 14000 5,57,700
(v) RRB Securities Ltd. 64100 1,09,51,800
(vi) HB Leasing & Finance Co. Ltd. 502480 1,72,78,388
(vii) Nova Electro Magnet Ltd. 418600 1,73,07,312 "
Out of seven (7) companies, whose shares / debentures were
purchased by the Appellant, as many as four (4) companies did
not belong to HB group. It needs to be emphasized here that
all the aforesaid shares were transferred in the name of the
Appellant before the expiry of relevant previous year. Shares of
HB Portfolio Leasing Ltd were transferred on 23.3.1996 and
that of Hot Line Teletube Ltd. on 2.1.1996 and that of RLE]
Securities Ltd on 18.12.1996 and that of HB Leasing & Finance
Co. Ltd on 12.2.1996 and that of Nova Electro Magnet Ltd
on 26.3.1996. In other words, delivery of the shares purchased
was actually taken.
(iv) Out of aforesaid purchase, assessee sold following shares /
debentures :-
10
I.T. Appeal Nos. 1590 & 1905/Del/2011
Assessment Years : 1996-97 & 1997-98.
" Sl. No. Name of the company. No. of shares Sale price
(i) HB Portfolio Leasing Ltd. 908700 (Deb) 5,52,24,472
(ii) RRB Securities Ltd. 31250 38,33,400
(iii) Nova Electro Magnet Ltd. 418600 1,73,07,312 "
(v) Transaction of purchase and sale of shares cannot be doubted
merely because the transactions between the parties have taken
place directly and not through the stock exchange / stock
brokers. CBDT in its Circular No. 704 dated 28.04.1995
reported in 213 ITR (St) 7 has recognized that the shares can be
purchased directly by the parties (pages 43 & 44 of the paper
book). Details of purchase and sale of shares / debentures as
also the chart of cost price of shares and their market value as
on 31.3.1996 are at pages 45 to 48 of the paper book.
14. Appellant Company has been maintaining its accounts as
mercantile system of accounting and the closing stock of shares
was valued at well established principle of cost or market value,
whichever is less. This factual position is evident from Tax Audit
Report for the year ended March, 1996, wherein, tax auditor has
stated that method of valuation of stock was cost of market
value, whichever is less. It is not the stand of the department
that method of valuation was not what was stated or that in
subsequent years assessee changed its method of accounting.
Loss of Rs.4,32,66,827/-, which is disputed before your honour
had occurred because of fall in market value of shares.
11
I.T. Appeal Nos. 1590 & 1905/Del/2011
Assessment Years : 1996-97 & 1997-98.
Comparative analysis of cost and market value ot shares
acquired during the year is evident from the following table :-
"Sl. Name of the company. Shares Cost Market value
No.
(i) HB Portfolio Leasing Ltd. 734200 4,64,71,600 1,98,23,400
(ii) Hotline Glass Ltd. 1000 11,200 12,250
(iii) Indo Gulf Industries Ltd. 2350 84,269 65,800
(iv) Hotline Teletube Ltd. 14,000 5,57,700 2,94,000
(v) RRB Securities Ltd. 32850 39,93,400 32,85,000
(vi) HB Leasing & Finance Co. 502480 1,72,78,388 80,39,680
Ltd.
(vii) Nova Electro Magnet Ltd. 418300 1,72,94,109 72,15,675
(viii) Hotline Teletube Ltd. 14,000 5,57,700 2,94,000
(ix) Zero FCD RRB 31250 3,12,5000 3,12,5000
TOTAL : 8,88,28,869 4,18,60,805
Market value of shares was taken on the basis of market
quotation because all the shares were quoted. Relevant
quotations are at pages 49 to 53 of the paper book.
What is important is that only value of shares of the group
companies were down but value of shares of other
companies also went down. Loss on account of fall in
market value was the result of fluctuations in share
market. Therefore, it cannot be alleged that loss was
managed.
15. The position that emerges from the facts set out above is
that the shares were actually purchased and sold. Since
transactions of purchase and sale of shares were not paper
12
I.T. Appeal Nos. 1590 & 1905/Del/2011
Assessment Years : 1996-97 & 1997-98.
transaction, therefore, the allegation that loss on account of fall
in market value of closing stock of shares was sham / fictitious
was baseless being not based on facts because market value
in turn was based on share market quotations. Balance sheet
of the Appellant as at 31.3.1996 is at pages 115 to121 of
the paper book.
16. That in succeeding assessment years, value of closing stock
was taken as opening stock and trading results were accordingly
worked out. This fact is sufficiently sufficient to believe the
inference that loss resulting in fall in market value was sham /
fictitious. Since the transactions of purchase an i sale itself was
not bogus I sham and purchase / sale price in the hands of the
Appellant was sale / purchase price in the hands of other parly,
therefore, neither any undue benefit has been drawn by the
Appellant nor by other parties from whom the shares were
purchased / sold. It important to note that in assessment year
1998-99, the Assessing Of has accepted trading results prepared
on aforesaid basis. The assessment order for assessment year
1998-99 is at pages 54 & 55 of the paper book.
17 The fact that assessee has not drawn any benefit is evident
from details oi carried forward losses, a copy of which is annexed
herewith at page 56 of the paper book. From the details, your
honour will appreciate that for assessment years 1999-2000,
2003-04, 2004-05, 2006-07, 2007-08 & 2008-09, returns of
declaring income were filed. In fact, loss for assessment year
13
I.T. Appeal Nos. 1590 & 1905/Del/2011
Assessment Years : 1996-97 & 1997-98.
1996-97 was not carried forward in assessment year 2000-01 and
that in any case, assessment year 2004-05 was the last year for
carried forward of loss for assessment year 1996-97. Computation
of income for assessment years 2003-04 to 2006-07 are at page
57 to 64 f the paper book. In the computation for the assessment
year 2003-04. Appellant did not carry forward loss for assessment
years 1996-97 & 1997-98;
18. In the identical case of HLA Trading and Agencies (P) Ltd,
wherein, on absolutely identical reasons the loss was disallowed,
this Hon'ble Tribunal vide order dated 18.11.2005 in ITA No.
1514/Del/2002 allowing the ap; held that Assessing Officer was
not justified in treating the assessee company as conduit or
sham. It is important to note here that Assessing Officer referred
to the aforesaid case in the assessment order. Order of ITAT
in the case of HLA Trading and Agencies (P) Ltd is at pages 65
to 72 of the paper book.
19. The allegation that the group indulged in buy back of its own
shares through a number of satellite companies to provide impetus
& buoyancy to share of H.B. Portfolio Leasing Ltd, so that its
public issue could be over subscribed. The allegation is not only
factually incorrect but is also without substance because public
issue came on 19.12.1994, i.e. much before the assessment year in
question, when the assessee company was not even existence.
Prospectus issued by H.B. Portfolio Leasing Ltd at pages 73 'o 110
of the paper book.
14
I.T. Appeal Nos. 1590 & 1905/Del/2011
Assessment Years : 1996-97 & 1997-98.
20. Sum up
(i) Shares were actually purchased and they were transferred in
the name of the Appellant.
(ii) Shares were actually sold and they were transferred in the
name of the buyer.
(iii) Shares were purchased and sold at the prevailing market rate.
(iv) Market forces dictated market value of the shares as on the
last date of the previous year. It was the result of these forces that
value of not only shares of HB group but shares of other
companies fell down drastically.
(v) In the succeeding years, closing valuation is taken as opening
valuation and trading results were accordingly drawn. Since
trading results for the year ended 31.03.1998 have been accepted
therefore, there is no reason to doubt or disallow loss on account
of valuation for the year ended March, 1996.
(vi) Department has not shown as to what undue benefit has
been derived by the Appellant. In-fact, no benefit of loss of
Rs.4,32,66,827/- has been drawn by the Appellant, inasmuch as.
in succeeding years either there was loss or tax was paid under
section 115JB and the loss remained unadjusted upto assessment
year 2004-05, which was the last year of the carry forward of loss.
Alleged tax avoidance
21. Entire case of the department revolves around the case of
McDowell and Co. Ltd. v. CTO (1985) 154 ITR 148 (SC). In the
15
I.T. Appeal Nos. 1590 & 1905/Del/2011
Assessment Years : 1996-97 & 1997-98.
present case, transaction was not a device to avoid tax because:
• It cannot be said that on the date assessee purchased a share
it knew that market value will fall and it will incur loss.
• No tax has been avoided because no tax was payable.
• Legal effect of transaction cannot be ignored. Transactions
cannot be ignored on the basis of alleged motive.
22 Hon'ble Supreme Court in UOI v. Azadi Bachao Andolan
(2005) 263 ITR 706, had occasion to consider the issue of act of
incorporation of "shell companies" by Foreign Institutional
Investors under the Mauritius Act as a "sham" and "a device"
actuated by improper motives. Considering this issue from the
prospective of device, the Hon'ble Apex Court having considered
the entire law on this issue, observed at page 762 that :-
" If the Court finds that notwithstanding a series of legal
steps taken by an assessee, the intended legal result has not
been achieved, the Court might be justified in overlooking the
intermediate steps, but it would not be permissible for the
Court to treat the intervening legal steps as non-est based
upon some hypothetical assessment of the 'real motive' of the
assessee. In our view, the court must deal with what is
tangible in an objective manner and cannot afford to chase a
will-o'-the-whip. "
23. So what is relevant is the legal result and not the
16
I.T. Appeal Nos. 1590 & 1905/Del/2011
Assessment Years : 1996-97 & 1997-98.
hypothetical real motive In the present case, it cannot be the
case of anybody that legal result of transactions undertaken
by the Appellant has not resulted. Admittedly, the same have
resulted. In such a case, real intention of the transaction
cannot be said to be different from the legal result. The issue
of real intention would come only where the legal results have
not followed and therefore, the transactions are to be ignored.
It is therefore, submitted that the whole case of the
department that the loss was sham or fictitious had no basis.
In view of what has been put forth above, it is submitted
that the claim of loss of Rs.4,32,66,827/- deserves to be
allowed. "
8. The ld. AR also referred page Nos. 26 to 110 of the paper book
which are copies of details of advances received and given with
confirmations; CBDT Circular No. 704 dated 28.04.1995 reported in
213 ITR (St.) 7; details of purchase and sale of shares with chart of
cost price of shares and their market value as on 31.03.1996;
market quotation of shares; assessment order for the assessment year
1997-98; chart of carried forward of losses; computation of income for
the assessment years 2003-04 to 2006-07; order of the Tribunal in
the case of HLA Trading and Agencies P. Ltd. and prospectus issued
by H. B. Portfolio Leasing Ltd.
17
I.T. Appeal Nos. 1590 & 1905/Del/2011
Assessment Years : 1996-97 & 1997-98.
9. Against the appeal for assessment year 1997-98, the ld. AR
has made following written synopsis :-
" 14. Explanation on facts :
(i) It is correct that paid up capital was 2000 but purchase and
sale of shares worth crores of rupees were made.
(ii) It is also correct that assessee received huge advances and
majority of companies from whom advances were received
were group companies. Details of the advances received with
confirmations and advances given were filed with the
Assessing Officer. It is not the case of the department /
Assessing Officer that :-
parties did not exist. There is no allegation to this effect.
parties from whom advances were received and the parties to whom
advances were given were assessed to tax.
fund flow chart filed in response to query raised on 12.12.2008 was
incorrect or otherwise improper.
Details of the advances received and advances given with
confirmations are at page 20 to 35 of the paper book.
(iii) During the year assessee purchased shares of following
companies :-
18
I.T. Appeal Nos. 1590 & 1905/Del/2011
Assessment Years : 1996-97 & 1997-98.
" Sl. No. Name of the company. No. of shares Purchase price
(i) Indo Gulf Industries Ltd. 126350 2545897
(ii) HB Portfolio Leasing Ltd. 14500 602600
(iii) HB Leasing & Finance Co. Ltd. 3000 63000
(iv) Hot Line Teletube Ltd. 7100 148340
(v) Crompton Greaves Ltd. 125650 31013954
(vi) Tata Iron & Steel Co. Ltd. 5000 1187802
(vii) DCM Sriram Industries Ltd. 22250 688604
(viii) Hotline Glass Ltd. 1011200 9477864
Total 45728061
Out of eight (8) companies, whose shares / debentures were
purchased by the Appellant, as many as six (6) companies did not
belong to HB group. It is important to note here that out of total
purchase of Rs.4,57,28,061/-, purchase of share of group
companies was only Rs.6,65,600/- (6,02,600 + 63,000), which
constitute less than 2% of the total purchase effected during the
year. Further, it needs to be emphasized here that all the aforesaid
shares were transferred in the name of the Appellant before the
expiry of relevant previous year. In other words, delivery of the
shares purchased was actually taken.
(iv) Out of aforesaid purchase, assessee sold following shares /
debentures : -
19
I.T. Appeal Nos. 1590 & 1905/Del/2011
Assessment Years : 1996-97 & 1997-98.
S. No. Name of the company No. of shares Sale price
(i) Indo Gulf Industries Ltd. 1050 21930
(ii) Hot Line Teletube Ltd. 150 4229
(iii) Crompton Greaves Ltd. 125000 15250000
(iv) DCM Sriram Industries Ltd. 3450 91305
(v) Hotline Glass Ltd. 620800 4622930.
(iv) Nova Electro Magnet Ltd. 900 5417
(v) Transaction of purchase and sale of shares cannot be
doubted merely because the transactions between the parties
have taken place directly and not through the stock exchange /
stock brokers. CBDT in its Circular No. 704 dated 28.04.1995
reported in 213 ITR (St) 7 has recognized that the shares can
be purchased directly by the parties. Details of purchase and
sale of shares as also the chart of cost price of shares and
their market value as on 31.3.1991 are at pages 36 to 40 of
the paper book.
15. Appellant Company has been maintaining its accounts as
mercantile system of accounting and the closing stock of shares
was valued at well established principle of cost or market value,
whichever is less. This factual position is evident from Tax Audit
Report for the year ended March, 1997, wherein, tax auditor has
stated that method of valuation of stock was cost of market value,
whichever is less. It is not the stand of the department that
method of valuation was not what was stated or that in
20
I.T. Appeal Nos. 1590 & 1905/Del/2011
Assessment Years : 1996-97 & 1997-98.
subsequent years, assessee changed its method of accounting.
Loss of Rs.3,85,55,340/- which is disputed before your honour
had occurred because of fall in market value of shares.
Comparative analysis of cost and market value of shares is
evident from the following table :-
S. No. Name of the company Shares Cost Market value
(i) Nova Electro Magnet Ltd. 417400 17270079 2504400
(ii) HB Portfolio Leasing Ltd. 748700 47074200 11604850
(iii) Hotline Glass Ltd. 402500 3844592 2254000
(iv) RRB Securities Ltd. 64100 7118400 6410000
(v) Hot Line Teletube & 20950 701065 209500
Component Ltd.
(Vi) Indo Gulf lndustries®Ltd. 127650 2592623 2106225
(vii) HB Leasing & Finance Co. Ltd. 505480 17341388 1895550
(viii) Crompton Greaves Ltd. 650 150267 ,58175
(ix) DCM Shriram Ind. Ltd. 18800 576688 451200
(x) Tata Iron & Steel Co. Ltd. 5000 1187803 802000
Total : 2311230 80587026 28295900
• Market value of shares was taken on the basis of market
quotation because all the shares were quoted. Relevant
quotations are at pages 41 to 47 of the paper book.
• What is important is that only value of shares of the group
companies were down but value of shares of other companies also
21
I.T. Appeal Nos. 1590 & 1905/Del/2011
Assessment Years : 1996-97 & 1997-98.
went down. Loss on account of fall in market value was the result
of fluctuations in share market. Therefore, it cannot be alleged
that loss was managed. Balance sheet of the Appellant as at
31.3.1997 is at pages 92 to 97 of the paper book. Scrip wise loss
on account of dealing in shares / valuation is at pages 98 to 102
of the paper book.
16. The position that emerges from the facts set out above is that
the shares were actually purchased and sold. Since transactions
of purchase and sale of shares were not paper transaction,
therefore, the allegation that loss on account of fall in market
value of closing stock of shares was sham / fictitious was
baseless being not based on facts because market value in turn
was based on share market quotations.
17. That in succeeding assessment years, value of closing stock was
taken as opening stock and trading results were accordingly
worked out. This fact is sufficiently sufficient to believe the
inference that loss resulting in fall in market value was sham /
fictitious. Since the transactions of purchase and sale itself was not
bogus / sham and purchase / sale price in the hands of the
Appellant was sale / purchase price in the hands of other party,
therefore, neither any undue benefit has been drawn by the
Appellant nor by other parties from whom the shares were
purchased / sold. It is important to note that in assessment year
1998-99, the Assessing Officer has accepted trading results
prepared on aforesaid basis.
22
I.T. Appeal Nos. 1590 & 1905/Del/2011
Assessment Years : 1996-97 & 1997-98.
18. The fact that assessee has not drawn any benefit is evident
from details of carried forward losses, a copy of which is annexed
at page 56 of paper book for assessment year 1996-97. From the
details, your honour will appreciate that for assessment years
1999-2000, 2003-04, 2004-05, 2006- 07, 2007-08 & 2008-09,
returns of declaring income were filed. In fact, loss for assessment
year 1997-98 was not carried forward in assessment year 2003-04
and that in any case, assessment year 2005-06 was the last year
for carried forward of loss for assessment year 1997-98. In the
computation for the assessment year 2003-04, Appellant did not
carry forward loss for assessment years 1996-97 & 1997-98.
19. In the identical case of HLA Trading and Agencies (P) Ltd,
wherein, on absolutely identical reasons the loss was disallowed,
this Hon'ble Tribunal vide order dated 18.11.2005 in ITA No.
514/Del/2002 allowing the appeal held that Assessing Officer was
not justified in treating the assessee company as conduit or sham.
It is important to note here that Assessing Officer referred to the
aforesaid case in the assessment order.
20. The allegationthat the group indulged in buy back of its own
shares through a number of satellite companies to provide impetus
& buoyancy to share of H.B. Portfolio Leasing Ltd, so that its public
is^ue could be over-subscribed. The allegation is not only factually
incorrect but is also without substance because public issue came
on 19.12.1994, i.e. much before the assessment year in question,
when the assessee company was not even existence.
23
I.T. Appeal Nos. 1590 & 1905/Del/2011
Assessment Years : 1996-97 & 1997-98.
21 Sum up :
(i) Shares were actually purchased and they were transferred in
the name of the Appellant.
(ii) Shares were actually sold and they were transferred in the
name of the buyer.
(iii) Shares were purchased and sold at the prevailing market
rate.
(iv) Market forces dictated market value of the shares as on
the last date of the previous year. It was the result of
these forces that value of not only shares of HB group but
shares of other companies fell down drastically. This
aspect assumes importance when seen in the context of
the fact that during the relevant year, purchase of shares of
HB group was less than 2% of total purchases made
during the year.
(v) In the succeeding years, closing valuation is taken as
opening valuation and trading results were accordingly
drawn. Since trading results for the year ended 31.03.1998
have been accepted, therefore, there is no reason to doubt or
disallow loss on account of valuation for the year ended
March, 1997.
(vi) Department has not shown as to what undue benefit has
24
I.T. Appeal Nos. 1590 & 1905/Del/2011
Assessment Years : 1996-97
1996 & 1997-98.
been derived by the Appellant. Infact, no benefit of loss of
Rs.3,85,55,340/
Rs.3,85,55,340/- has been drawn by the Appellant,
inasmuch as, in succeeding years either there was loss or
tax was paid under section 115JB and the loss remained
unadjusted upto assessment year 2005
2005-06,
06, which was the
last year of the carry forward of loss.
•
Alleged tax avoidance
22. Entire case of the department revolves around the case
of McDowell and Co. Ltd. v. CTO (1985) 154 IT
ITRR 148 (SC). In
the present case, transaction was not a device to avoid tax
because:-
It cannot be said that on the date assessee purchased a
share it knew that market value will fall and it will incur loss.
No tax has been avoided because no tax was payable.
Legal effect of transaction cannot be ignored. Transactions
cannot be ignored on the basis of alleged motive.
23. Hon'ble Supreme Court in UOI v. Azadi Bachao Andolan
(2005) 263 ITR 706, had occasion to consider the issue of act
of incorporation of "shell companies" by Foreign Institutional
Investors under the Mauritius Act as a "sham" and "a device"
actuated by improper motives. Considering this issue from
the prospective of device, the Hon'ble Apex Court having
considered the entire law on this issue, observed at page
25
I.T. Appeal Nos. 1590 & 1905/Del/2011
Assessment Years : 1996-97 & 1997-98.
762 that :-
" If the Court finds that notwithstanding a series of legal
steps taken by an assessee, the intended legal result has
not been achieved, the Court might be justified in overlooking
the intermediate steps, but it would not be permissible for
the Court to treat the intervening legal steps as non-est
based upon some hypothetical assessment of the real
motive' of the assessee. In our view, the court must deal with
what is tangible in an objective manner and cannot afford to
chase a will-o'-the-wisp. "
24. So what is relevant is the legal result and not the hypothetical
real motive. In the present case, it cannot be the case of anybody
that legal result of the transactions undertaken by the Appellant
has not resulted. Admittedly, the same have resulted.'In such a
case, real intention of the transaction cannot be said to be
different from the legal result. The issue of real intention would
come only where the legal results have not followed and
therefore, the transactions are to be ignored. It is therefore,
submitted that the whole case of the department that the loss
was sham or fictitious had no basis.
In view of what has been put forth above, it is submitted
that the claim of loss of Rs.3,85,55,340/- deserves to be
allowed. "
26
I.T. Appeal Nos. 1590 & 1905/Del/2011
Assessment Years : 1996-97 & 1997-98.
10. The ld. AR also referred to page Nos. 20 to 110 of the paper
book which are copies of details of advances received and given with
confirmations; details of purchase and sale of shares with chart of
cost price of shares and their market value as on 31.03.1997;
market quotation of shares; account of Mr. S.C. Khaneja with all the
bills / contract notes issued by him; balance sheet of the assessee as
on 31.03.1997; script wise loss on account of dealing in shares /
valuation; written submission before the ld. CIT (Appeals) in original
assessment; letter dated 7.07.1997 with details of advances received;
and names and addresses of parties / brokers from whom shares
were purchased / sold during the year.
11. Besides, the decisions cited above, the ld. AR placed reliance
on the following decisions :-
(i) ITO Vs. Smt. Aarti Mittal (2014)
149 ITD 728 (Hyd. Trib.);
(ii) Mridu Hari Dalmia Parivar Trust Vs. Assessing Officer (2016)
158 ITD 521 (Del.);
27
I.T. Appeal Nos. 1590 & 1905/Del/2011
Assessment Years : 1996-97 & 1997-98.
12. We have already discussed the facts of the case in the
above paragraphs. It is second round of appeal before the Tribunal.
On earlier occasion, the Tribunal vide its common order dated
28.09.2007 in ITA. Nos. 212 & 2717/Del/2003 (assessment years
1996-97 and 1997-98) had set aside the matter vide para No. 8
(1996-97) and para No. 10 (1997-98) to the file of the Assessing
Officer for fresh assessment on the issue. The relevant para
Nos. 8 and 10 of the order of the Tribunal are being reproduced
hereunder :-
" 8. We have heard both the parties and perused the material
available on record. On perusal of material we find that the
Assessing Officer has not examined the real nature of
transaction. The assessee had purchased shares of other
companies which are not group companies of HB group. From
assessment order, we also find that Assessing Officer had not
given any finding as to how the shares of other companies were
acquired directly and when all the shares were transferred in
the name of assessee. The purpose for which advance were
received. The assessee received shares application money of
Rs.24,50,500/- and applied for allotment of shares by payment
of share application money of Rs.66 lakhs. The real intention
28
I.T. Appeal Nos. 1590 & 1905/Del/2011
Assessment Years : 1996-97 & 1997-98.
of such transactions have not been investigated. Therefore,
in our considered view, it will be fair and reasonable if the
matter is set aside to the file of Assessing Officer with the
directions that he should decide the entire issue with reference
to the transactions involved in other group companies. The
Assessing Officer will ascertain the nature of the transactions.
He will afford a reasonable opportunity of being heard to the
assessee. "
" 10. In assessment year 1997-98, the ld. CIT (Appeals) had
enhanced the assessment by disallowing the loss on account of
shares. Since we have set aside the appeal for assessment
year 1996-97, we feel it proper to set aside this issue also to the
file of Assessing Officer with the similar direction. "
13. The ld. CIT (Appeals) has discussed the issue in detail
and has come to the following findings in the assessment year
1996-97 and followed the same in the assessment year 1997-98 :-
" 9. I have considered the order of the ld. Assessing Officer
and the submissions made by the ld. AR of the assessee.
There is no doubt that the share capital of the assessee was
only Rs.2,000/-. On this, a huge amount of transactions had
taken place which were mainly financed from the funds of the
29
I.T. Appeal Nos. 1590 & 1905/Del/2011
Assessment Years : 1996-97 & 1997-98.
group companies. During the year, there is no doubt that the
assessee had credited in the shares of the group companies,
but apart from that had also engaged in trading of shares of
other companies such as Hotline Glass Ltd., Indo-gulf
Industries Ltd., Hotline Tele-tube Ltd., RRB Securities Ltd.
and Nova Electro Magnetics Ltd. In such circumstances, it
cannot be stated that only the shares of the group company
was transacted and the loss generated. At Pages 49-53, the
quotations of the shares in which transaction had taken
place was also given as part of the Paper Book. There is no
doubt that the transactions had taken place at the market
price which had since suppressed. As such, as per the
accounting policy the assessee was constrained to book the
value of the investments at the cost or the market price
whichever was lower. Considering the revealing documents
that had been filed, it cannot be stated that the transactions
engaged in by the assessee were sham and the issue of
colourable device would come in.
10. It is important to mention here that while framing the
impugned order, the ld. Assessing Officer has not examined
the real nature of transactions. The purpose for which
advances were received had only been commented upon, but
the basic foundation had not been enquired. The real
30
I.T. Appeal Nos. 1590 & 1905/Del/2011
Assessment Years : 1996-97 & 1997-98.
intention had also not been investigated. In other words, the
order of the Delhi Tribunal was not complied with.
11. There is no doubt that income tax is a levy on income.
Here the ld. Assessing Officer has alleged that the apparent is
not real. However, as held in CIT Vs. Daulatram Rawatmal
(1973) 87 ITR 349 (SC). It is now settled law that the onus of
proving that the apparent is not the real is on the party who
claims it to be so. Here, the onus lay on the Revenue to prove
the same as it was the Department which was emphasizing
that the transactions and the consequent losses were sham.
This allegation remains unproved.
12. In view of the discussion above, I see no reason how the
addition can be sustained. The assessee deserves to succeed
in Grounds of Appeal No. 3 and its parts. I may clarify,
however, that this decision of mine will not prejudice the
decision in the assessment and appellate proceedings
pursuant to the search operation. They are independent
proceedings. "
14. Having gone through the orders of the authorities below,
we find that in his order the ld. CIT (Appeals) has meet out the
objections raised by the Assessing Officer while disallowing the loss
31
I.T. Appeal Nos. 1590 & 1905/Del/2011
Assessment Years : 1996-97 & 1997-98.
claimed by the assessee on account of valuation of shares held as
stock in trade treating the same as sham and bogus. The objection of
the Assessing Officer was that only the shares of group company was
transacted and the loss generated. The ld. CIT (Appeals) has meet
out this objection with this finding that during the year there was
no doubt that assessee had credited in the shares of the group
companies but apart from that the assessee had also engaged in
trading of shares of other company, such as, Hotline Glass Ltd.,
Indo Gulf Industries Ltd., Hot Line Tele Tube Ltd., RRB Securities
Ltd. and Nova Electro Magnetic Ltd. He has referred page Nos. 49
to 53 of the paper book i.e. the quotations of the shares in which
transactions have taken place. The ld. CIT (Appeals) has noted
further that there was no doubt that the transactions have taken
place at the market price which has since suppressed. As such,
as per the accounting policy the assessee was constrained to book the
value of investments at the cost of the market price, whichever was
lower. In absence of rebuttal of these material facts noted by the ld.
CIT (Appeals), we do not find reason to interfere with the findings of
the ld. CIT (Appeals) on the issue that the transaction engaged in by
the assessee were sham and the issue of colourable device would
32
I.T. Appeal Nos. 1590 & 1905/Del/2011
Assessment Years : 1996-97 & 1997-98.
come in. The ld. CIT (Appeals) has observed that while framing the
impugned order the Assessing Officer has not examined real nature
of the transactions. The purpose for which advances were received
have only been commented upon, but the basic foundation had not
been enquired. The real intention has also not been investigated and
thus, order of the Tribunal was not complied with. Since the Revenue
could not improve its case before the Tribunal by rebutting the above
findings of the ld. CIT (Appeals), we are not inclined to interfere with
the first appellate order. The same is upheld. The view taken by
the ld. CIT (Appeals) is also supported by the above cited decisions. The
Delhi Bench of the Tribunal in the case of Mridu Hari Dalmia
Parivar Trust Vs. Assessing Officer (supra), the assessee suffered long
term capital loss on off market sale transaction of shares and carried
forward said amount for future set off. The Assessing Officer, observing
that if those transactions had been made through recognized
stock exchange with STT payment, then loss would not have been
carried out forward within meaning of section 10(38), held that
assessee used a colourable device to avoid tax and, therefore,
disallowed such loss by holding it to be bogus. It was held that it
was a glaring example of tax planning rather than tax avoidance.
33
I.T. Appeal Nos. 1590 & 1905/Del/2011
Assessment Years : 1996-97 & 1997-98.
As such, loss being a genuine loss could not be disallowed as it
does not fall within ambit of section 10(38). Again in the case of ITO
Vs. Smt. R.C. Mittal, the Tribunal has upheld the first appellate order
wherein the ld. CIT (Appeals) had opined that in absence of any
positive evidence, merely on the basis of suspicion, transactions
could not be held to be not genuine. In that case the assessee had
claimed entire sale proceeds arising out of transaction of long
term capital gain exempt from tax under section 10(38) of the Act. The
Assessing Officer did not believe transactions as genuine and treated
the entire sale proceeds as income from other sources. We thus, do
not find substance in the grounds of the appeals preferred by the
Revenue and the same are rejected.
15. In result, both the appeals of the Revenue are dismissed.
16. The order is pronounced in the Open Court on : 14 th July, 2017.
Sd/- Sd/-
( L. P. SAHU ) ( I. C. SUDHIR )
ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated : the 14th July, 2017.
*MEHTA*
34
I.T. Appeal Nos. 1590 & 1905/Del/2011
Assessment Years : 1996-97 & 1997-98.
Copy of the Order forwarded to :-
1. Appellant;
2. Respondent;
3. CIT;
4. CIT (Appeals);
5. DR, ITAT, ND.
BY ORDER
ASSISTANT REGISTRAR Date Draft dictated on 14.07.2017 Draft placed before author 14.07.2017 Draft proposed & placed before the second member Draft discussed/approved by Second Member.
Approved Draft comes to the Sr.PS/PS Kept for pronouncement on File sent to the Bench Clerk Date on which file goes to the AR Date on which file goes to the Head Clerk.
Date of dispatch of Order.
35I.T. Appeal Nos. 1590 & 1905/Del/2011 Assessment Years : 1996-97 & 1997-98.